Fin 684
Fixed-Income Analysis
Professor Robert B.H. Hauswald
Kogod School of Business, AU
Case Study
Walt Disney’s Yen Financing
In 1985, the Walt Disney Company undertook an intriguing global financing deal. In a single chain
of transactions involving parties based in New York, Paris and Tokyo, Disney simultaneously raised
funds in USD, partially hedged a JPY royalty stream, and became the first US corporation to issue a
sinking-fund ECU bond in the Euromarket. This case demonstrates the financing flexibility available
to corporate treasurers sourcing funds on a global scale and shows also how currency swaps can be
used as a hedging technique.
In order to understand the case’s fundamental issues you first need to be familiar with the following
concepts:the global bond market, the ECU (http://fx.sauder.ubc.ca/ECU.html), operating exposure,
FX hedging, and foreign currency swaps. Any decent international-finance textbook should provide
a succinct exposition of the underlying financial concepts and techniques. You might also want to
consult the Note on Foreign Currency Swaps and make sure you understand their mechanics which are
similar to the roundtrip arguments (CIA, Money Market Hedge). Finally, obtain a clear understanding
of Disney’s decision problem. For this purpose you should discuss the following questions and issues in
your group:
1. Should Disney hedge its JPY royalty cash flow? Explain. If so, how much should be hedged and
over what time frame?
2. Assuming a hedge is desirable, what hedging techniques are available to the treasurer and what
are the advantages and disadvantages of each?
3. Why do you think does a market for currency swaps exist given the many other techniques for
hedging currency exposure? What value does the swap create for Disney and what risks might
be involved?
4. Evaluate financing alternatives, especially the ECU bond issue accompanied by an ECU/JPY
swap. How does its all-in cost1 compare to that of the proposed JPY term loan? Is it superior
to hedging using outright forwards?
Disney’s finance director, Rolf Anderson, is considering two different alternatives and has invited
two banks to present their solution: Sumitomo bank (the JPY term loan) and Goldman Sachs (the
ECU bond with swap).
1. Groups 3, 6, 9
You are from the International Clients group in Sumitomo Bank’s Corporate Banking department.
Disney’s Finance Committee has invited you to present the JPY term loan solution to the Board. Be
professional (use slides) and convincing both in your presentation and the accompanying financing and
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All-in cost refers to the annualized discount rate that equates the present discounted value of future debt service
payments with the financing proceeds less up-front fees. It is a financing strategy’s annualized internal rate of return.
risk management proposal! After all, you are up against Goldman Sachs and their high-flying financial
engineering experts.
Your write up and presentation should consist of a summary of the term loan, explain why Disney
should choose this solution and, last but not least, why it should arrange the term loan through
Sumitomo Bank. In particular, you need to answer the following questions. How does the term loan
work? Why does is solve Disney’s dilemma? What are the advantages of the term loan for Disney?
Why is it, in Sumitomo’s opinion, preferable to any other solution?
2. Groups 1, 4, 7
The main alternative pushed by Goldman Sachs consists of issuing an ECU Euro-bond and swapping
the payment streams into yen. Goldman Sachs has already found a counterparty for such a swap, a
French utility. You are from Goldman’s Institutional Clients group and try to land the deal for your
company. To this end you have put together a presentation and a handout for Disney’s Board of
Directors on the ECU deal.
In your presentation to the board you might wish to address the following questions. What are ECU
Eurobonds and why may this be a cheaper way to obtain funding for Disney Company? What are the
mechanics of swapping the payment streams into yen and how can this be profitable for both parties,
Disney and the French utility (as to the latter part of the question, think comparative advantage, rather
than absolute advantage, see also MBF 10)? Why should Disney arrange the deal through Goldman?
3. Groups 2, 5, 8
You are part of the currency and interest rate risk analysis team in Disney’s Finance Division. Your
boss, Rolf Anderson, has decided to go with the ECU Eurobond cum swap alternative but needs to
explain this long-term financial strategy to the Disney Board of Directors who are leaning toward
the JPY term loan solution. This is unsurprising: many of the members of the board of directors
are entertainment industry experts but have little financial expertise and are not familiar with the
intricacies of managing foreign exchange exposure. Hence, they have a natural inclination for the more
familiar and easily understood loan.
He has charged you with briefing the Board of Directors on the ECU Eurobond issue. The main
points of your presentation is to explain Disney’s hedging and funding problem, to outline the main
alternative hedging options, and to explain the intricacies of Anderson’s choice, the ECU Eurobond
with swap. How does Disney’s current funding situation affect its ability to borrow Yen or incur
additional US$ debt and swap it into Yen? You should illustrate these points in a memorandum to
the board of directors, consisting of a two-page executive summary and a longer 6 page appendix that
provides the necessary back-up information for your summary.
Please note the following ground rules for the case write-ups:
• the maximal group size is 5; every group member receives the same grade
• at most 2 pages of analysis, and 6 pages of technical appendices;
• show your work, staple the pages together and be professional ;
• late write-ups will not be accepted for any reason; they are due at the beginning of class for which
the discussion is scheduled;
• graded write-ups will be available a week later.
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