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Case Analysis

International Financial Markets Peter MacKay

February 21, 2002 Ryan Case Mark Duncanson Christopher McRoberts Jenn Nabb Rob Norr

Due to past depreciation in the yen, Disney has decided to consider hedging future yen royalties paid by Tokyo Disneyland. Disney can enter into a currency swap to capitalize on its comparative advantage to borrowing in its local debt market and therefore obtain interest rates more favorable than the French utility could hope to obtain. Each party then swaps the currency they could receive at lower rates and share in the overall benefit. Disney may also wish to hedge long-term foreign exchange exposures since future fluctuations of a currency can erode a project’s NPV to the point of rendering it unprofitable. Furthermore, Disney could have reached the limit of their borrowing capabilities and are looking for a way to borrow more. It is an indirect way of going into capital markets to obtain a desired currency. Both Disney and the French utility have the opportunity of obtaining loans with lower overall costs. They can also convert fixed-rate debt into floating-rate debt (or vise versa) to better match revenue streams. IBJ can benefit from this arrangement through commissions and fees. As currency swap activity increases, the revenue generated from this activity has become significant. The swap bank also benefits when it pays out less than it receives from each counter party to the other counter party. Currency swaps are off-book transactions since they do not appear on a balance sheet as assets or liabilities. Although appearing as a footnote in the financial reports, this method of borrowing can elude all but the very thorough examinations. Disney and the French utility will realize benefits when they can match debt to revenues in the same currency. The avoidance of exchange-rate fluctuations can often green light

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