Consider the currency risk faced by Walt Disney Company (DIS), which generates revenues from all over the world. One of its biggest sources of income is Tokyo Disney. The firm expected to receive ¥500 mln from its Tokyo operation in three months and another ¥500 min in six months. It would like to lock in the exchange rate on these two cash flows and thereby eliminate the risk of an unfavorable move in exchange rates. The investment banker indicates that the three-month forward $/ rate is 0.009123. The investment banker also offers a six-months forward contract at a rate 0.009178 $/¥. What hedging strategy Disney will take? How much home currency will the company receive from its operation in Tokyo in six months?

Consider the currency risk faced by Walt Disney Company (DIS), which generates revenues from all over the world. One of its biggest sources of income is Tokyo Disney. The firm expected to receive ¥500 mln from its Tokyo operation in three months and another ¥500 min in six months. It would like to lock in the exchange rate on these two cash flows and thereby eliminate the risk of an unfavorable move in exchange rates. The investment banker indicates that the three-month forward $/ rate is 0.009123. The investment banker also offers a six-months forward contract at a rate 0.009178 $/¥. What hedging strategy Disney will take? How much home currency will the company receive from its operation in Tokyo in six months?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter27: Multinational Financial Management

Section: Chapter Questions

Problem 14P

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In light of the currency risk faced by Walt Disney Company (DIS), which generates income globally, including a significant portion from Tokyo Disney, the company foresees receiving *500 million from its Tokyo operations in three months and another *500 million in six months. To safeguard against unfavorable exchange rate fluctuations, Disney aims to secure the exchange rates for these cash flows. The investment banker has provided information that the three-month forward $/¥ rate is 0.009123. Now, let's explore the following: a) What hedging strategy will Disney employ, and how much of the home currency will the company receive in three months? b) Additionally, the investment banker is offering a six-month forward contract at a rate of 0.009178 $/*. Should the firm consider this opportunity, and what would be the revenue in home currency in six months? c) Suppose Toyota is expecting two cash flows in dollars from its US operations, one in three months and the other in six months, and…
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