The Walt Disney Company’s Yen Financing1)Should Disney hedge its yen royalty cash flow? Why or why not?The Walt Disney Company receives royalties, payable in yen, on specific revenues generated by Tokyo Disneyland, which is operated by an unrelated Japanese company. Since the theme park’s opening in April 1983, the spot rate of the yen has continually depreciated. In little over a year, from 1983 to 1984, that rate had depreciated by almost 8%. With royalty receipts over ¥8 billion in 1984, that represents a total loss of over $2.5 million. Since these receipts are expected to grow by 10% - 20% per year over the next few years, the potential loss in revenue for Disney could increase significantly. If the yen remains unstable, the foreign exchange risk faced by Disney could be substantial. In order to minimize their exposure to this risk, Disney should hedge its yen royalty cash flow. 2)What hedging alternatives are available to Disney’s treasurer?
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