Japanese investors purchased from Walt Disney Productions projected yen royaltie

Question

Japanese investors purchased from Walt Disney Productions projected yen royalties. The 20-year stream of royalties is for Tokyo Disneyland. The present value of that stream of royalties, discounted at 5 percent (the return required by the Japanese investors), was ¥95 billion. Disney took the yen proceeds from the sale, converted them to dollars, and invested the dollars in bonds yielding 8 percent. At the time of the sale, the exchange rate was ¥79.8408 = $1.

a. What amount (in dollars) did Disney realize from the sale of its yen proceeds?

b. Describe the similarities and differences between Walt Disney's transaction and a currency/interest rate swap.

Explanation / Answer

a. What amount (in dollars) did Disney realize from the sale of its yen proceeds?

Answer - Disney realized 95,000,000,000/79.8408 = $1,189,867,837 from the sale of its future yen proceeds.

b. Describe the similarities and differences between Walt Disney's transaction and a currency/interest rate swap

Answer - In a currency/interest rate swap, one party trades a stream of payments in one currency, at one interest rate, for a stream of payments in a second currency, at a second interest rate. Disney's stream of yen royalties can be treated as a yen bond, which it traded for a dollar bond, with dollar payments. The only difference between the Disney swap and a traditional swap is that the latter usually involve cash outflows whereas the Disney swap involves cash inflows

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