An Innovation Swap: Analyzing the Disney Yen Finance Case

Leying Zhou

Shanghai World Foreign Language Academy, Shanghai, 200032, China

Keywords: Foreign Exchange Rate Risk, Foreign Forward/Future Contracts, Foreign Exchange Options, Currency Swap.

Abstract: This research based on the background that the Japanese Yen depreciated from ¥229.70/USD to ¥248/USD,

causing the Disney’s yen-denominated royalty receipts translated into fewer dollars, reducing the value of

Disney’s income. This essay aimed to evaluate all methods Disney had to reduce the foreign exchange rate

risk, showing their benefits and downsides, and finally give out the one that is the most suitable for this case,

which is the currency swap with the French Utility. By using calculations, we can see the currency swap can

reduce borrowing rates and therefore directly help Disney to deal with the FX and long-term debt problems.

The meaning of this research is to introduce the innovation swap policy to the public, and maybe give an

alternative way of dealing with FX risks to those multinational companies that are currently in a similar

situation. The recommended policy in this essay is the currency swap between Disney and the French Utility,

which might seem to innovate but is useful to other multinational companies that is currently still struggled

with FX risk.

1 INTRODUCTION

Disney Yen Finance case is mainly talking about in

1985, Disney faced severe exchange rate risk as it

received income from Tokyo Disney in Yen. The

company tried many traditional methods but failed. It

eventually pursued an innovative solution by issuing

ECU bonds and swapping them into yen, achieving

lower financing costs and hedging against currency

risk.

According to the case, Tokyo Disneyland is

owned and operated by a Japanese company that has

no connection with the Disney Group. This company

is responsible for the construction and daily

management of the theme park. The Disney Group

does not own Tokyo Disneyland outright, but through

licensing agreements, it grants permission for the use

of the Disney brand, characters, technologies, and

business concepts. Therefore, Disney receives royalty

fees from the operation of Tokyo Disneyland. These

fees are paid in Japanese yen and are calculated based

on a certain percentage of certain revenue items of

Tokyo Disneyland. Although Disney does not

directly participate in the operational activities of

Tokyo Disneyland, this portion of the yen revenue

from the Japanese market has become an important

component of its entertainment and leisure business

income. For example, in the fiscal year 1984, the total

revenue of Disney's entertainment and leisure

division reached 1.097 billion US dollars, which

included royalty income from Tokyo Disneyland.

These yen revenues have grown rapidly and are

expected to continue to grow at an annual rate of 10%

to 20% in the coming years. Therefore, though the

two are completely independent in terms of

ownership and operation, Tokyo Disneyland remains

an indispensable part of the Disney Group's overseas

revenue structure.

Mutinational companies are cross-border

companies that establish subsidiaries or branches

abroad through direct foreign investment. This

definition was given in Foreign Exchange Risk

Management of Mutinational Companies (Wang,

2020). In this case, the Disney and Tokyo Disney

situation perfectly fit the definition of the

mutinational companies. So, Disney can be seen as a

mutinational company.

Mutinational companies may face many risks,

foreign exchange rate risk is a really typical one.

Exchange Rate Risk Measurement and Management:

Issues and Approaches for Firms (Papaioanou, 2006)

emphasizes that exchange rate risk can strongly affect

multinational companies’ financial stability and

profitability by causing adverse effects on a

company's cash flow, asset value, and market

valuation, so therefore must be effectively managed.

Zhou, L.

An Innovation Swap: Analyzing the Disney Yen Finance Case.

DOI: 10.5220/0014350900004718

Paper published under CC license (CC BY-NC-ND 4.0)

In Proceedings of the 2nd International Conference on Engineering Management, Information Technology and Intelligence (EMITI 2025), pages 271-276

ISBN: 978-989-758-792-4

271

In the case, the Walt Disney company received

growing royalty payments in Japanese yen from

Tokyo Disneyland. These royalties was then

exchanged into dollars for Disney’s further financials

and obligations, as well as a significant source of

income. However, in 1985, as Japanese Yen

depreciated from ¥229.70/USD to ¥248/USD, the 8%

depreciation of the currency caused the Disney’s yen-

denominated royalty receipts translated into fewer

dollars, reducing the value of Disney’s income. Since

the royalties were expected to grow and continue over

many years, the risk of long-term losses due to

currency (exchange rate) fluctuations became

significant. This explains the exchange rate risk

Disney faced. The IMF report then introduces the

widely used risk measurement method - Value at Risk

(VaR) model, and analyzes various hedging strategies.

In addition, it elaborates on the commonly used

hedging tools by multinational companies, such as

forward contracts, currency options, and currency

swaps. All these methods introduced were used in the

Disney Yen Finance case. But since Disney’s case is

a bit more complex, these traditional methods end up

failed to solve the problm. The report also cites

practical cases of American enterprises, indicating

that large enterprises tend to use derivative tools for

exchange rate risk management, with a particular

focus on controlling the fluctuations of cash flow and

accounting income. This laterly aligned perfectly

with the currency swap that Goldman introduced to

save Disney from the exchange rate risks.

This essay is going to detaily analyze Disney’s

strategies that are used to deal with its exchange rate

risk in a very financial way. Also, this essay is going

to explore why traditional methods don’t always

solve problems and how the new innovation methods

(goldman’s currency swap) save Disney from its

exchange rate risk.

2 FOREIGN EXCHANGE

FORWARD CONTRACTS

According to Importance of Forard Contracts in

Financial Crisis (Djenic et al., 2012), foreign

exchange forward contract is agreement betwee two

participants in the trade that commits one party to sell

an asset to the other party at a pre-agreed price on due

date. It is a common terminology of derivatives and

is an effective tool for hedging exchange rate risks by

reducing the impact of exchange rate fluctuations on

income and asset values. However, forward contracts

also have some drawbacks. Firstly, due to their low

liquidity, enterprises may encounter difficulties when

they need to adjust their hedging strategies. Second,

forward contracts may lead to the "value premium"

phenomenon, where the price paid by enterprises for

hedging transactions may be higher than the market

price, and the use of contracts limits the potential

gains that enterprises can obtain from exchange rate

changes. Moreover, forward contracts have potential

counterparty risk. As written in Measuring and

Marking Counterparty Risk, Chapter 9 of

Asset/Liability Management of Financial Institutions

(Duffie et al., 2003), counterparty risk is the risk that

a party to an OTC derivatives contract may fail to

perform on its contractual obligations, causing

financial losses to others. Such risk will add

counterparty cost, liquidity risk and uncertainty in the

market of the contract holders.

Forward contracts should be implemented by

steps. The steps are generally summarized as identify

risks, sign contracts and realize the hedge. In this

Disney case, the process of hedging exchange rate

risks using foreign exchange forward contracts can

also be carried out based on the above three steps:

Firstly, identify the exchange rate risk : Since the

licensing fees of Tokyo Disneyland are paid in yen,

Disney faces the risk of future exchange rate

fluctuations, as now the yen depreciates from

¥229.70/USD to ¥248/USD, reducing Disney’s

income in US dollars. The second step is to sign a

foreign exchange forward contract. Disney can sign a

forward contract with a bank or financial institution

to lock in the yen-to-dollar exchange rate at a certain

point in the future, to ensure that the licensing income

in the future will not be affected by exchange rate

fluctuations. The third step is to implement the hedge.

With reference to the the agreed exchange rate in the

contract, the exchange can be carried out to ensure

that the yen income received by Disney from Tokyo

Disneyland is converted into US dollars at the fix

exchange rate, avoiding potential losses due to the

depreciation of the yen. Through this process, Disney

may manage its exchange rate risks and protect its

future US dollar income.

This is the over-the-counter (OTC) agreement

where both parties agree to exchange currencies at a

fixed rate on a future date. For Disney, this means it

can lock in the value of future yen income converted

into dollars. The advantage of this approach is that, it

can be fully customized according to Disney's

revenue schedule. However, forward contracts also

have significant limitations. The most important one

is that long-term contracts have poor liquidity. In the

fifth year, the hedging cost spread is approximately

2.15%; while in the tenth year, the spread will reach

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about 8.5%, which means that Disney needs to bear a

relatively high transaction cost. This is bad for its

increasing long-term debts. Therefore, this method is

abandoned by Disney.

3 FOREIGN EXCHANGE

FUTURES

Unlike forwards, futures are standardized exchange-

traded contracts. According to Foreign Currency

Futures:Reducing Foreign Exchange Risk (Chalupa,

1982), future contract is a standardized financial

contract that obligates the buyer to purchase and the

seller to sell, an underlying asset at a predetermined

price at a apecified future sate. It is typicallt traded on

organized exchanges, such as th Chicago Mercantile

Exchange (CME), and can be used to hedge against

foreign exchange rate risk. Better than forward

contracts, foreign future contracts do not involve

counterparty risk.

In Disneys case, to hedge exchange rate risks,

foreign exchange futures contracts can be

implemented as follow. First, Disney needs to

identify and clearly understand that the exchange rate

risk it faces come from the yen licensing fees paid by

Tokyo Disneyland. Then, it should sign foreign

exchange futures contracts. Disney can choose to sign

foreign exchange futures contracts with financial

institutions or through a futures exchange, agreeing to

exchange yen for US dollars at a fixed exchange rate.

Thus, Disney can ensure that the future yen income

can be converted into US dollars at the predetermined

exchange rate. For example, if Disney expects to

receive 1 billion yen in the future, it’ll be a good idea

if it can lock in the future exchange rate through the

futures contract to guarantee its future gains. The

third step is to implement hedging. Disney can settle

according to the terms of the contract and converts its

yen income into US dollars at the agreed exchange

rate. In this way, Disney can reduce the risks caused

by exchange rate fluctuations and ensure that the

income it receives from Tokyo Disneyland maintains

a stable US dollar value, avoiding the possible

negative impact of the yen depreciation in the future.

However, such traditional contract also don’t fit

the situation that Disney faced in the case. Take the

CME's Japanese yen futures as an example. Each

contract represents 12.5 million yen. To hedge 2

billion yen of income, Disney would need to purchase

160 contracts. It’s too costly for Disney, especially it

was experiencing increasing long-term debts at that

time. The advantage of the futures market lies in its

high liquidity and transparency. But the problem lies

in that futures contracts typically have an expiration

period of no more than two years (The case clearly

states that liquidity markets only exist for two years

or less), which cannot meet Disney's hedging needs

for as long as ten years. And purchase all these

contracts are time and money consuming.

4 FOREIGN EXCHANGE

OPTIONS

A foreign exchange option is a financial derivative

that gives the holder the right, but not the obligation,

to buy or sell a specified amount of one currency for

another at a predetermined exchange rate on or before

a specified date. It is commonly used to hedge against

or speculate on movements in foreign exchange rate

risks. According to The Pricing of Call and Put

Options on Foreign Exchange (Grabbe, 1983),

foreign options usually arise in three principle

contexts, organizing trading on exchanges, then to the

bank markets and finally to the international bond

markets.

Foreign options are still double side policies. It

does have some advantages like providing protections

to unfavorable currency changes and high felxibility

in hedging strategies. But its downsides are obvious,

too. For example, it’s far more complex to implement

than forwards, and the premium paid can be costly

especially in volatile markets.

In the Disney case, the steps to hedge currency

risk using foreign exchange options are as follows:

First, identify the risk that the yen now depreciates,

so the company faces the risk of reduced dollar

income. Second, Disney could purchase an option on

the Japanese yen and set a guaranteed minimum

exchange rate. For instance, it could buy an option

with a strike price of 240 yen to the dollar and pay a

5% premium. Notice that, unlike forward or futures

contracts, options grant the holder the right but not the

obligation, which means that if the market exchange

rate is favorable to Disney at maturity (such as when

the yen appreciates), Disney can choose not to

exercise the option and exchange yen at the spot

market rate; if the yen depreciates, it can exercise the

option and exchange yen for dollars at the pre-agreed

exchange rate, thereby locking in the minimum

exchange level. If the yen depreciates or appreciates

to 220 at that time, Disney can choose to exercise the

option or let it expire and exchange at the market rate.

In this way, Disney can use the foreign options as a

highly flexible hedging tool, and is especially suitable

An Innovation Swap: Analyzing the Disney Yen Finance Case

273

for the continuously growing yen income risk and

long-term debt it faced at that time.

Although options offer greater flexibility, they

also face the problem of a lack of liquidity in long-

term contracts (Liu et al., 2024). Case show that the

options market is basically inactive for terms of more

than two years. More importantly, the premium cost

of long-term options is very high, which may offset

most of the gains brought by hedging and intense the

problem of Disney’s growing long-term debts.

From above, traditional foreign exchange

derivatives all have significant flaws in addressing

Disney's long-term exchange rate risks. So such

methods are not recommended in this case.

5 THE YEN TERM LOAN

To hedge against exchange rate risks, the Japanese

company seriously considered obtaining a Japanese

Yen Term Loan of 15 billion yen from a Japanese

bank. The loan had a term of 10 years and a bullet

repayment structure, with an annual interest rate of

7.5% and an upfront fee of 0.75% to be paid at the

beginning of the loan. According to the information

provided in the case, the loan would require Disney

to pay interest every six months, which amounts to

562.5 million yen, and repay the entire principal of 15

billion yen in a lump sum at the end of the tenth year.

From the perspective of capital cost, the actual net

financing amount that Disney obtained from this loan

was 14,887.5 million yen (150 billion yen minus the

upfront fee of 0.75%, which is 112.5 million yen). If

this amount of funds is discounted against the cash

flow of paying interest every six months and repaying

the principal at the end, the annualized actual cost of

this loan will be approximately 7.70%, which is

higher than 7.50%. Thus, it can be seen that although

the surface interest rate is not high, due to the

existence of the upfront fee, the actual cost of the loan

has slightly increased.

The main advantage of this financing method lies

in its simple structure and currency matching, which

can form a natural yen liability corresponding to the

yen income of Tokyo Disneyland, thereby effectively

hedging against future exchange rate fluctuations. In

addition, this plan can provide a long-term source of

funds and keep interest expenses at a fixed level,

facilitating financial budgeting and planning.

However, this plan also has obvious disadvantages.

Firstly, the actual financing cost of 7.70% is relatively

high and does not have a significant advantage in the

international financing environment at that time.

Secondly, this loan does not bring dollar liquidity, so

it cannot help Disney alleviate its short-term dollar

debt pressure in the United States. Finally, this loan is

an external currency liability. If the yen appreciates

for a long time, it will increase the company's debt

repayment cost and bring additional economic risks.

The downsides beat the benefits, made this option

not the best choice for Disney at that time.

6 CURRENCY SWAP WITH THE

FRENCH UTILITY

As traditional methods seemed to be useless,

Goldman came up with a brilliant and innovated idea,

execute a currency swap with the French Utility.

A currency swap, is where two parties exchange

principal and interest payments in different currencies,

allowing each to access their desired currency at a

reduces cost by leveraging comparative advantages in

borrowing rates (Bodie et al., 2014). It is usually used

to deal with exchange rate risks.

Currency swap has some advantages. First, it is a

perfect method to deal with the exchange change rate

risks multinational companies may face, since it help

prevent loss caused by exchange rate changes.

Second, executing currency swaps helps to optimize

the interest rate structure, as it converts floating rate

into fixed rate, and therefore reduced cost of

borrowing and may deal with the liabilities and assets

(Jemannu et al., 2022). Third, it increases the

convenience of obtaining foreign currency funding,

as it has deepen the connection between member

countries, and promoting own country’s currency to

the global currency market as well (Zhang, 2024).

Finally, most importantly, currency swap contract can

last longer than any other methods introduced above,

which can effectively help to reduce long-term debts.

However, it has some downsides too. First, credit

risk may appear if the counterparty defaults. This may

lead to significant losses. Second, there’s still risk of

high premium cost involved. As research From CIP-

Deviations to a Market for Risk Premia: A Dynamic

Investigation of Cross-Currency Basis Swap

(Chatziantoniou et al., 2019) shown, since 2007, the

deviation in the cost of violating the interest parity

condition (CIP) has shown that market frictions (such

as transaction costs and credit risks) still exist,

suggesting that swaps are not completely cost-free

and there is a risk premium involved. Third, the

currency swap system involves companies across

countries, which is complex for normal companies to

execute. Under the complex structure, asymmetric

information may appear.

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In this case, both French Utility and Tokyo Disney

can borrow other’s currency with a comparative

advantage. They then execute a currency swap. At the

beginning, French Utility will give the Yen’s

principle to Disney and Disney will give its ECU

principle to the French Utility. During loaning, the

French Utility will pay the lower ECU interest for

Disney, and Tokyo Disney will pay the lower Yen

interest for the French Utility, based on the principals

both parties received. Finally, they swap back the

principle amount. Therefore, by swapping, the French

Utility can have an ECU loan at a relatively lower

borrowing rate (dropped from 9.75% to 9.19%) and

receives ECU. Tokyo Disney can also receive Yen

and pay Yen’s borrowing rate relatively lower

(dropped from 7.5% to 7.01%) by swapping. The

decreasing borrowing rate shows that both parties

were better-off in this swap.

The advantages for this swap are: First, Disney’s

issuance of ECU Eurobonds—converted into yen—

showed that non-European, non-financial firms could

tap the ECU market, promoting diversity. Second,

there’s lower effective cost of Finance for both sides,

as I proved it just now by showing the decreasing

IRRs. Third, the swap perfectly matches Disney’s

future yen royalty receipts from Tokyo Disneyland,

creating a long-term hedge against currency risk.

Finally, the swap help Disney to reduce its short-term

US debt, by converting the initial yen proceeds into

dollars to repay short-term borrowings. This

improves Disney's overall debt structure and liquidity.

However, there were still downsides. First, The

swap involves multiple parties (e.g. Tokyo Disney,

the French utility, IBJ), creating a complex financial

structure that requires careful management. Disney is

only the second U.S. corporation to engage in this

kind of swap, so the execution risk is higher. Second,

in the swap, Disney relies heavily on its

counterparties. If either the French utility or IBJ ran

into trouble, Disney could be exposed to more risk.

Third, arranging the swap incurred extra fees that

might reduce the financial benefits. And finally, the

ECU market was still developing, the market

reception of Disney’s ECU bond issuance was

uncertain. There could be challenges in ensuring

liquidity or finding buyers for the Eurobond,

especially since Disney would be the first issuer with

a sinking fund on an ECU bond.

But overall, ECU/Yen currency swap was still

useful to reduce the foreign exchange rate risk for

Tokyo Disney, as well as to reduce further of its short-

term debt, but meanwhile, all other methods showing

their cost is greater than the revenue by applying them,

therefore are not preferred to choose.

7 CONCLUSION

This essay bases on the research background of the

Tokyo Disney and Disney as mutinational companies,

once faced severe exchange rate risk. As Japanese

Yen depreciates from ¥229.70/USD to ¥248/USD,

the 8% depreciation of the currency caused the

Disney’s yen-denominated royalty receipts translated

into fewer dollars, reducing the value of Disney’s

income, inhance the pressure brought from the

increasing long-term debt. This essay aimed to

analyze all methods Disney had thought of to reduce

the foreign exchange rate risk, evaluate all methods

and showing why Disney ended up giving up all

traditional policies, but came up with a really

innovated and brilliant one, a currency swap with the

French Utility. Also, this essay later shows what is the

currency swap and how it works to actual benefit both

Disney and the French Utility. The key discovery of

this essay is about detailly analyzing the invention,

the process and the gain of the currency swap ran by

Disney and the French Utility, therefore,

recommending multinational companies that may

face the similar situation as Disney did in the future

to consider this currency swap policy that can actual

decrease its borrowing rate in local currency and help

to deal with the long-term debts.

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