Walt Disney is thinking over supporting future yen inflows from Disney Tokyo. It is assessing systems utilizing FX Forwards, swaps, and Yen term borrowings. Goldman Sachs offers a fairly abnormal however conceivably appealing arrangement: Disney could issue ECU Eurobonds and swap into a Yen obligation. The case highlights how this option would function and proposes to the students approaches to assess the supporting decisions.
Historical Summary of Average Yen/Dollar Exchange Rates and Price Indexes
Projection of the Yen 8 Billion royalties by 10% per year
Cash Flows of 10-Year ECU Eurobond with Sinking Fund (millions)
ECU/Yen Swap Flows, in Millions (assuming $/ECU of .7420 and yen/dollar of 248)
Summary of the French Utility’s Outstanding Publicly Traded Eurobonds—as of Mid-1985 (excluding domestic issues, private placements, and term loans)
Should Disney hedge its yen royalty cash flow? Why or why not? If so, how much should be hedged and over what time frame?
Assuming a hedge is desirable, what hedging techniques are available to the treasurer and what are the advantages and disadvantages of each?
In light of the various other techniques for hedging currency exposures, why does a market for currency swaps exist? Who benefits and who loses in such an arrangement? Can a swap really create value for a corporation, and if so, where does the value come from? What risks does a swap carry for the various parties involved?
The data in Exhibit 6 gives us an idea of how investment banks make money by underwriting bonds. Goldman Sachs’ proposal of Disney’s ECU Eurobond issuing will give Disney a net cash flow of 78.499 million ECUs at t = 0. Please show the calculations of how this number is obtained.
Evaluate Goldman's proposal for an ECU bond issue accompanied by an ECU/yen swap. How does its "all-in" yen cost compare to that of the proposed yen term loan? Is it superior to hedging using outright forwards? (Note: "all-in" cost generally refers to that discount rate which equates the present discounted value of the future debt service payments with the financing proceeds less front-end fees [i.e. the internal rate of return], expressed as an annual rate).