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15.437, Fall 2005 Options and Futures Markets Case Write-up: The Walt Disney Companys Yen Financing police squad Members: Krzysztof Fidkowski, kfid@mit.edu Shivashis Nayak, snayak@mit.edu Zachary Skolnik, zms@mit.edu Joy Tang, joyt@mit.edu Yujun (Eugene) Xiao, exiao@mit.edu Bin Zhou, binzhou@mit.edu October 13th, 2005 1. Should Disney hedge its yen royalty flip-flop flow? Why or why not? If Disney chose to do hedging for its yen royalty cash flow, it give strike the following advantages and disadvantages: Advantages Eliminating or reducing exchange and yen absorb rate risks (especially when the yen was losing value relative to the dollar, and the exchange was vaporific while the companionship will receive increasing measurement royalty incomes each year). Avoiding accounting impact due to the exchange rate uncertainty in the future. Without hedging, earnings will be affected by the exchange rate change and will not be smooth if the exchange rate fluctuates. Allowing the company to focus on its core strategies: Disney is an operational company. It does not involve to speculate.

Disadvantages Losing potential benefits of currency diversification: In terms of diversification, having a Yen inflow may be desirable (e.g. if dollar loses value). If the company fully hedged yen, it will not trounce such benefits. Introducing some other uncertainties: The hedging is based on the forecast that the company will keep receiving increasing yen cash flows in the future years. However, such forecast may not be guaranteed. If the company did the hedge, the yen incomes from Japan, for some reason, decreases or cease to come and yen appreciates in the future, the company may lose ground. Incurring potential PR issue: hedgerow may be viewed by the public as a sign that the company is doing some speculation (remember the Metallgesellschaft case). In the regard as time, the royalties do not comprise a large grammatical constituent of Disneys revenue. As... If you want to get a full essay, order it on our website: Ordercustompaper.com

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