Team

10

Steven Lambe Fred Patet Petr Khalfen

Yunyun Xu Ashmita Srivastava

Established in 1923 by Walt & Roy Disney

Largest Media Conglomerate Today

Component of DJIA & S&P500

 Movies
 Music
 Disneyland Theme Parks
 Resorts
 Recreational facilities
 Restaurants
 Hotels
 Games
 Consumer Products; etc.
$1,800,000 Revenue
3000000

$1,600,000
2500000
Costs and Expense
$1,400,000

$1,200,000 2000000

Income(Loss)Before
$1,000,000 1983
Corporate Expenses 1500000
and Unusual 1984
$800,000
Charges +244%
Corporate Expenses 1000000
$600,000

500000
$400,000
Net Income
$200,000 0
Total Asset Borrowing
$0
1982 1983 1984

Financial development Total Assets & Borrowings

Net Income, Total
Assets , Consolidated
Revenues Borrowings
& Corporate expenses

Operating profit before

corporate expenses for
entertainment &
Recreation segment
 Currency
Exchange
Royalties in Rate Risk
Yen

Disneyland,
Japan
 Historical Exchange rate of Expected Growth in Yen
Yen/Dollar Royalties
270
25.00
260
257.5

250.8 20.00
250
248.3
246.1
243.6
240 15.00
237.4

230 230.8
229.7 10% Growth
Yen/Dollar 10.00
225.7 20% Growth
220 220.1
5.00
210

0.00
200
1984 1985 10% Growth
1986 1987
1988 1989
1990
 Hedging
Strategies

Currency Forward Futures Foreign

options Contract Contract Swap Currency loan
Hedging method Advantages Disadvantages
Options •Flexibility •Short Term Hedge
•Low transaction cost •Up-Front premium
•Leverage

Futures •Standardized •Short Term Hedge

contracts •Difficult to customize
•High liquidity •Initial Margin
•Low Transaction cost

Forwards •Long Term Hedge •Limits upside potential

•Negotiable size •High Bid Ask spread
•No Initial Margin •Counterparty Risk

Term Loan •Spot exchange rate •Balloon payment at the end

•Long Term Hedge •High Debt
•High Leverage •Expensive

Swap •Long Term Hedging •No upside potential

•Flexibility •Low Market Liquidity
•Off Balance Sheet •Counterparty Risk
Transaction
Hedging method Recommendation Reason

Options Not Recommended Doesn’t provide long term

hedge

Futures Not Recommended Doesn’t provide long term

hedge

Forwards Not Recommended Bank requires

Term Loan Recommended Disney can borrow ¥ 15 billion

Swap Recommended Disney can swap ECU

 10-year
Loan

7.50%
Annual Yen Bullet 0.75%
Front-end
Loan
Percentage
fees
Rate

Semiannual
interest
payments &
principle
paid at
maturity.
Yen Bullet Loan

IRR= 7.753%
1. ECU 80 million ten-year Eurobonds at
100.25% of par, 9.125% coupon, 2%
underwriting fees.

2. ECU/¥ swap intermediated by Industrial

Bank of Japan (IBJ)

3. French state-owned utility interested in

swapping yen debt for ECU debt
 ECU 80
Million
loan

Price
Fees 2%
100.25%
ECU/Yen
SWAP with
French Utility
Coupon Expenses
9.125% $75,000

USD/ECU
0.7420
IRR=7.010%
 Yen Loan
- IRR:
7.753 %

ECU/Yen
Swap -
IRR:
7.010%

Best Choice - ECU/Yen Swap

The Walt Disney • Cost reduction of
0.743%
Company

Industrial Bank of • In total it makes ECU

Japan 400,000

• Cost reduction of 0.28%

French Utility

• Single payment of 1.6

Goldman Sachs Million ECU (2% Fees)
 The Walt Disney Co. Accepted Goldman Sachs
Proposal with ECU/Yen swap.

 It was followed by a second ECU note offering

in December 1985.

 Disney began engaging in more foreign

currency swaps in order to take advantage of
attractive borrowing rates.