2. In May 1988,Walt Disney Productions sold to Japanese investors a 20-year stream of projected yen royalties
Question:
2. In May 1988,Walt Disney Productions sold to Japanese investors a 20-year stream of projected yen royalties from Tokyo Disneyland. The present value of that stream of royalties, discounted at 6% (the return required by the Japanese investors), was ¥93 billion.
Disney took the yen proceeds from the sale, converted them to U.S. dollars, and invested the dollars in bonds yielding 10%. According to Disney’s chief financial officer, Gary Wilson, “In effect, we got money at a 6% discount rate, reinvested it at 10%, 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 U.S. dollar amount did Disney realize from the sale of its Japanese 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?
Step by Step Answer:
International Financial Management
ISBN: 9781118929322
10th Edition
Authors: Alan C. Shapiro, Peter Moles