Question: In May 1988 Walt Disney Productions sold to Japanese investors

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.''
a. 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?
b. Demonstrate the equivalence between Walt Disney's transaction and a currency swap. c. Comment on Gary Wilson's statement. Did Disney achieve the equivalent of a free lunch through its transaction?

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  • CreatedJune 27, 2014
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