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Essay / Research Paper Abstract
A 5 page paper assessing whether Disney should hedge the yen royalties it expects to receive from Tokyo Disneyland beginning in 1985. Based on Harvard Case 9-287-058, the paper discusses the use of derivatives (currency swap); whether to hedge; and provides the formula for determining the Internal Rate of Return (IRR) to be used in deciding whether to hedge. Bibliography lists 7 sources.
Page Count:
5 pages (~225 words per page)
File: CC6_KSfinDisneyYen.rtf
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Unformatted sample text from the term paper:
permanent trend toward globalization brings with it the need to equalize business results based on widely varying changes in world currencies. The Walt Disney Company faced decisions in derivative
use in the mid-1980s. 1. Should Disney hedge its yen royalty cash flow? Disney likely should not hedge its yen royalty cash
flow, particularly by committing to a long-term yen liability with a Japanese bank. "Modern portfolio theory suggests that currency risk should be embraced, not hedged away" (What is Currency
Overlay?), but this is true only to a point. Foreign currency movements can occur either quickly (as in devaluation) or slowly over the long term. Either way, hedging
activities will allow Disney to choose from a much longer list of options should such a currency event or collection of events negatively affect the value of the yen.
Even though theorists currently believe that holding unhedged funds constitutes managing the risk involved in foreign currency exposure, there still is a point at
which those funds should be hedged as well. "Generally speaking, a foreign exposure equaling 12% or more of the total portfolio is the threshold at which currency movements have
a noticeable impact on performance and should be hedged" (What is Currency Overlay?). In Disneys case in the mid-1980s, there were other, broader
considerations that should have influenced Disneys decision. The international oil crisis of 1973-74 had driven American car-buyers attention to the Japanese imports that until then had gained only passing
interest in the United States. The higher quality of the Japanese cars won the loyalties of many US consumers, so much so that by the mid-1980s Japanese companies were
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