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of Hedging We suggested that Walt Disney should hedge the exchange rate of royalty revenue from Tokyo Disneyland. Should Walt Disney hedge
its cash flow? Position Walt Disney has operation exposure. I'm the richest
gagagag !! Heyy !! The Walt Disney Company is a diversified international company with headquartered in California entertainment and recreational complexes motion pictures and television features developed community real estate projects consumer products It’s main divisions receive royalty from
Tokyo Disneyland the company had to face possible foreign exchange exposure 1. Currency options 3. Foreign Currency Futures 2. Foreign Currency Forwards 4. Bullet loan 5. Currency Swaps PROBLEMS Net position in foreign currency.
- Long position
- Short position.
For Walt Disney : Walt Disney is in long position.
How to close : Walt Disney should create obligation in Yen, short position in foreign currency to be squared position. Goal of Hedging The optimal risk (hedge ratio) profile that balances the benefits of protection against the costs of hedging. The result isn’t more than JPY 8,000 million in 1985. Based on royalty revenue 1984.
Walt Disney should maximum hedge by the outcome result in the present each year and considering trend of Tokyo Disneyland outcome result as a reference.
Considering hedging cash flow
year-by-year in the future. How much should be hedge and over what time frame? reduce cost of capital
hedge exchange rate and interest rate exposure
strategy for administration
speculate Designed to make hedging activities more efficient in global markets
Provide firms access to capital that are not available in traditional markets with international trade
Attractive alternative to the use for long-dated currency cover
So, there is using extensively such as commercial bank, investment bank, non-finance firm etc.
Why does market for currency swaps exist ? Important reason to use currency swaps The parties can
determine the form and agreement
negotiate the maturity
communicate directly Benefit of currency swaps Come from changing of market factors as follow: The risk of currency swaps Rate risk : changing of interest rate and exchange rate Counterparty risk : other party in contract default, not follow an agreement borrowing directly in Yen—¥15million10-year bullet loan
Issuing ECU80million 10-year Eurobonds and then swap into a yen liability the cost equal to 7.75% annual rate
( Directly borrow ¥15million 10-year bullet loan)
There are 2 step :
Issuing ECU Eurobonds
ECU/Yen SWAP between Walt Disney
and French utility (Issuing ECU80million 10-year Eurobonds
then do the ECU/Yen swap) Disney’s all-in cost of ECU Eurobonds equal to 9.47% annual rate. The alternative2 could save Disney’s costs by 0.74% or 74 basis points
Also, French Utility could save cost by 0.183% or 18.3 basis points. Considering points: Credit line
Get 2% underwriting fee So, it would be a win-win transaction. Disney’s Hedging alternatives Alternative 1 Alternative 2 1. Issuing ECU Eurobonds 2. ECU/Yen SWAP
between Walt Disney and French utility SWAP Process All in cost of both company
from SWAP transaction
Additional compare this Currency Swaps with Outright Forward Restructuring Transaction cost Compare the cost of 2 Alternatives In conclude, it seem like it would be a good idea for Walt Disney and French Utility to do currency swap Who benefit in this transaction ? Walt Disney French Utility Lower all-in ECU cost International Bank Japanese (IBJ) Fee
Reduce the chance of customer to have default risk
Opportunity to meet another potential client Goldman Sachs In conclusion, every parties would gain benefits from this currency swap transaction. WIN-
WIN What will we focus on in the next part?
French Utility has a comparative advantage in Yen, so it would borrow in Yen
Walt Disney has a comparative advantage in ECU,
so it would borrow in ECU Walt disney company background Disney's hedging Alternatives General Alternatives for hedging Currency Swaps Hedging General Alternatives for hedging Currency Swaps Disney's hedging Alternatives Value of currency swaps come from ? cost of capital reduction
a lower cost hedging instrument
no negative impact for the firm’s books