Disney

Case

Disney Case

Questions: The Walt Disney Company’s Yen Financing

1. Should Disney hedge its yen royalty cash flow? Why or why not? If so, how much should be hedged and over what time frame?

Disney should hedge its yen royalty cash flow. Disney relies on the conversion of its yen royalty cash flow to US dollars in order to reduce its debt obligation and finance its American operations. Disney expects that its yen royalty cash flow will grow at 10% to 20% per year over the next few years. Between 1984-85, the yen depreciated by 8% versus the USD. It is recommended that Disney hedge ¥15 billion given that its yen royalty cash flows will grow significantly over the next few years and that Disney is considering the possibility of a ten-year yen term loan with a face value of ¥15 billion.

There are several factors to consider regarding Disney’s hedging options. Disney will require a long-term hedge to match the inflow of its yen royalty cash flows. However, the forwards market is liquid for contracts with maturities of two years or less. Long-term contracts are not readily available to hedge with. Disney can utilize long-term FX forward contracts, however this will tie up valuable credit lines.

Disney should hedge its yen royalty cash flow using a swap and not forwards or futures contracts. A swap will lower its “all-in” yen financing costs and will serve to exchange Disney’s ECU liabilities for a yen liability.

2. Assuming a hedge is desirable, what hedging techniques are available to the treasurer and what are the advantages and disadvantages of each?

There are five hedging options available to the treasurer:

1. He can use a combination of options and futures to hedge. Options are flexible. Their advantage is that you will not ever end up with a reverse exposure. For example, if you predict Y8 billion in yen Cashflow, you have a long exposure to the yen of eight billion, but if the royalty ends up being Y6 billion only, you won’t...