Problem:
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 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."
Q1. 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?
Q2. Demonstrate the equivalence between Walt Disney's transaction and a currency swap.
Q3. Comment on Gary Wilson's statement. Did Disney achieve the equivalent of a free lunch through its transaction?