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The Walt Disney Company's Yen Financing
Case Study in COMM 328
Q1. Yes, Walt Disney Company should certainly hedge the yen vips cash flow for the following reasons: JPY royalties grows fast: The Walt Disney Company has been receiving yen royalties for several income generated simply by Tokyo Disneyland. During the fiscal year 1984, yen royals receipts have been just over almost 8 billion yen and this number is anticipated to increase 10% to 20% yearly above the next few years. Provided that the bills incurred by the company will be paid in dollars, Walt Disney Business would not be able to escape through the foreign exchange risk that it may face. Yen/Dollar rate varying: The current area rate of 248 yen/dollar represented practically 8% depreciation in the worth of the yen from 229. 70 just over a year ago. Nonetheless it has valued in the 1 / 4 since then. By Chart you and Data 2, we can see that the U. S. inflation has exceeded Japanese inflation for the past a few years, which indicates the future depreciation of buck against Yen. Furthermore, the forward charge (Exhibit 5) also shows the same devaluation of dollars. Given the recent depreciation of the yen against the buck, it is progressively difficult to forecast the future worth of the yen. Considering the long term trend, could be it does not need to concern the depreciation from the JPY, however, if the appreciation of JPY is leaner than requirement will also harm Disney's prepare. Therefore , that can't be more precise to prepare comprehensively. Just how much should be hedged and over what time frame Disney Company obtains Yen royalties of almost 8 billion with expected annually growth rate of 10%-20% and has its significant expenses in dollars. It requires the hedge of foreign currency risk by least eight billion. Although from Display 3, it is shown that Disney Company has its own yen term loan. Through calculation, the yen term loan which will be due of 2/1/93 features 12. 5 billion yen outstanding and 765 , 000, 000 semiannual yen (1. 53 billion twelve-monthly yen) main payments, since at 31 March, 1985. There is another $50 mil due in March 1989 which the business swapped into approximately 12 billion yen liability. This would require Disney to pay 7. 4% of doze billion which can be equivalent to zero. 888 billion dollars which is a real small number compared with the almost eight billion yen. As for the word of hedge, Disney should think of hedge techniques for the maximum swap term: 10 years.
Q2. Advantages and Disadvantages of Hedging Methods: Futures Industry Advantages: As futures legal agreements are traded in a central market, it has a higher level of fluid. There is a pool area of industry participants obtainable and this increases the probability to be able to buy or sell futures. Disadvantages: Once inside the contract, we have a legal requirement to follow through till the conclusion. As such, in the event that currency actions were to a couple of
Case Study in COMM 328
move in the contrary direction from what has been predicted, then these advantageous movements will have to be foregone. Also, considering that the futures agreement has a number of agreed upon terms, such as contract size and hedging, it is relatively rigid and perfect hedging could possibly be impossible. In case, liquid market segments for upcoming contracts existed only for maturities of two years or fewer. The term didn't want to hedge the long-term JPY royalties very well. Options Industry In this case, the dollar yen options acquired by Disney could allow them to buy dollars against yen at a predetermined rate or that they could also work out their put options letting them sell yen for dollars at a predetermined charge. Advantages: It gives you the right, but is not the obligation, to exercise the choice on or perhaps before the expiration date, when it comes to an American option. This provides a limit to the potential losses but no limit to any potential gains. Likewise, the use of choices in hedge provides increased flexibility when compared with forwards or futures deals. Disadvantages: Due to its greater overall flexibility, options typically require a high grade amount and...
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