Case Scenario: "Walt Disney Company's Yen Financing"
Question 1. Should Disney hedge its yen royalty cash flow? Why or why not? If so, how much should be hedged and over what time frame?
Question 2. Assuming a hedge is desirable, what hedging techniques are available to the treasurer and what are the advantages and disadvantages of each?
Question 3. 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?
Question 4. 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).