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 Ґ93 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 Ґ124 = $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?
Business Homework Solutions
#82808
Exchange Rates
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?
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