Disney Hedge Its Yen Royalty Term Paper

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If Disney hedges its yen royalty cash flow then earnings would be stabilized and risk would be reduced. In order to efficiently hedge its yen royalty cash flow, it is recommended that Disney take out short-term loans in yen in order to match its revenue stream. This will allow the company to have cash inflow and outflow in yen. The minimum amount of yen that is borrowed should be equal to reducing short-term borrowing to 1983's 43% debt/capitalization ratio. This borrowing should help Disney to maintain the company's favorable credit rating and reduce short-term borrowings.

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Disney should forego hedging to speculate exchange movements. Because of this, the amount of revenue that is hedged should not exceed royalty revenue amounts. It is recommended that Disney opt for 10-year term hedging strategies and that hedging should not exceed ¥15 billion -- which is equal to the amount of term loan. During this 10-year term, Disney should have the flexibility to use any favorable method to increase revenue streams and decrease short-term….....

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