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es and fail to pay their obligations. Therefore the swap bank would have to fulfill the obligation of the defaulting party to the counter party. It is expected that the maturity dates and the size of the principal sums needed by the counter parties are going to differ widely so finding an exact match of needs in the swap is difficult; therefore, a mismatch risk is always present and must be managed.
Sovereign Risk—Countries can, at any time, impose exchange restrictions on their currency so this risk is always present. Changes could result in rendering the currency swap unprofitable or impossible.
2. Undesirable Hedging Techniques
Among the options Disney has to hedge its risk, there are several undesirable options, which it should avoid. First, Disney could use foreign exchange options, futures, and forwards to hedge its risk. Typically, these contracts exist only for maturities of 2 years or less; thus, going against a Disney long-term hedging strategy. Second, foreign exchange forward contracts could be used. However, these instruments have the same short maturities and are considered by banks as part of its total exposure to Disney, and tie up valuable credit lines. Third, Disney could swap out existing dollar debt into Yen liability. This short-term strategy was done earlier as Disney issued Eurodollar not to mature from 1 to 4 years. This is unattractive because of the scarcity of Yen swap rates for maturities less than 4 years. In addition, this option would not provide for any additional cash and Disney is interested in reducing its short-term debt. Fourth, long-term Eurodollar debt, which could be more effectively swapped into Yen, is inadequate because of Disney’s recent Eurodollar note issue and their temporarily high debt ratio. Finally, Disney could issue Euroyen bonds; however, Disney was ineligible to issue these bonds under the current Japanese Ministry of Finance Guidelines.
3. Disney Alternatives
Disneyland received ￥8 billion in royalties from Tokyo Disneyland in fiscal 1984 and Andersen expects these receipts to grow at 10% - 20% per year over the next few years. Furthermore, the current spot rate of ￥248/$ represents almost an 8% depreciation in the value of the yen from ￥229.7/$ a year ago. Based on this information, Disney has decided to hedge these yen cash flows with one of two options: issue a 10-year yen loan or issue a 10-year ECU Eurobond swapped with a French utility’s yen bond.
Disney’s first option, a ￥15 billion, 10-year bullet loan with interest of 7.5 % paid semi-annually, has an all-in-cost of 7.75%. At first glance, this option represents an attractive way to pay down their higher interest short-term debt and hedge yen cash flows.
Alternatively, Disney could issue a 10-year ECU Eurobond with a sinking fund that would then be swapped into a yen liability at an attractive all yen cost. This debt instrument at an all-in-cost of 7.01% has lower costs than the yen loan. Goldman was prepared to underwrite ECU80 million 10-yr Eurobonds at 100.25% of par, with a coupon of 9 1/8%, and underwriting fees of 2%. Additional expenses to be paid by Disney were capped at $75,000. ECU Eurobonds would have an annual sinking fund payment of ECU16 million beginning in the 6th year and continuing until maturity.
In addition to arranging the Eurobond, Goldman would also arrange an ECU/yen swap intermediated by the Industrial Bank of Japan (IBJ), shown in Exhibit 1. Disney would exchang本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。