Walt Disney Productions sold to Japanese investors a twenty-year stream of projected yen royalties
Not what you're looking for?
Can you help me get started on this assignment?
Problem #1:
In May 1988, Walt Disney Productions sold to Japanese investors a twenty-year stream of projected yen royalties from Tokyo Disneyland. The present value of that stream of royalties, discounted at 6 percent (the return required by the Japanese investors), was ¥93 billion. Disney took the yen proceeds from the sale, converted them to dollars, and invested the dollars in bonds yielding 10 percent. According to Disney's chief financial officer, Gary Wilson, "In effect, we got money at a 6 percent discount rate, reinvested it at 10 percent, and hedged our royalty stream against yen fluctuations?all in one transaction."
a. At the time of the sale, the exchange rate was ¥124 = $1. What dollar amount did Disney realize from the sale of its yen proceeds?
b. Demonstrate the equivalence between Walt Disney's transaction and a currency swap. (Hint: A diagram would help.)
c. Comment on Gary Wilson's statement. Did Disney achieve the equivalent of a free lunch through its transaction?
________________________________________
Problem #6:
Walt Disney expects to receive a Mex$16 million theatrical fee from Mexico in ninety days. The current spot rate is $0.1321/Mex$, and the ninety-day forward rate is $0.1242/Mex$.
a. What is Disney's peso transaction exposure associated with this fee?
b. If the spot rate expected in ninety days is $0.1305, what is the expected U.S. dollar value of the fee?
c. What is the hedged dollar value of the fee?
d. What factors will influence the hedging decision?
Purchase this Solution
Solution Summary
You will find the answer to this puzzling assignment inside...
Solution Preview
Problem #1:
In May 1988, Walt Disney Productions sold to Japanese investors a twenty-year stream of projected yen royalties from Tokyo Disneyland. The present value of that stream of royalties, discounted at 6 percent (the return required by the Japanese investors), was ¥93 billion. Disney took the yen proceeds from the sale, converted them to dollars, and invested the dollars in bonds yielding 10 percent. According to Disney's chief financial officer, Gary Wilson, "In effect, we got money at a 6 percent discount rate, reinvested it at 10 percent, and hedged our royalty stream against yen fluctuations?all in one transaction."
a. At the time of the sale, the exchange rate was ¥124 = $1. What dollar amount did Disney realize from the sale of its yen proceeds?
=93 billion / 124 = 0.75 billion ...
Purchase this Solution
Free BrainMass Quizzes
Production and cost theory
Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.
Introduction to Finance
This quiz test introductory finance topics.
Motivation
This tests some key elements of major motivation theories.
Understanding Management
This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.
Six Sigma for Process Improvement
A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.