# In May 1988, Walt Disney Productions sold to Japanese investors a 20-year stream of projected yen royalties

## Question:

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?

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...
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