Japanese investors purchased from Walt Disney Productions projected

Currency and Interest Rate Swaps

1. Japanese investors purchased from Walt Disney Productions projected yen royalties. The 20-year stream of royalties is for Tokyo Disneyland. The present value of that stream of royalties, discounted at 5 percent (the return required by the Japanese investors), was ¥95 billion. Disney took the yen proceeds from the sale, converted them to dollars, and invested the dollars in bonds yielding 8 percent. At the time of the sale, the exchange rate was ¥79.8408 = $1.

a. What amount (in dollars) did Disney realize from the sale of its yen proceeds?
b. Describe the similarities and differences between Walt Disney’s transaction and a currency/interest rate swap.

2. Coca-Cola is considering entering into a currency swap involving $14 million of U.S. debt for an equivalent amount of euro debt. Assuming the swap matures in 10 years, the interest rate on Pfizer’s outstanding 8-year dollar debt is 8% (paid semi-annually), the interest rate on the euro debt is 6 percent (paid semi-annually), and the current spot exchange rate is $1.24/€; structure a swap for Coca-Cola.

3. IBM wants to swap out of $10,000,000 of fixed interest rate debt and into floating interest rate debt for 3 years. Assume the fixed interest rate is 7.625 percent and the floating rate is dollar LIBOR. What semiannual interest payments will IBM receive and what will IBM pay? (Hint: A table of interest paid and received by IBM and the financial institution will help).

Here’s the SOLUTION

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