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problem: In May 1988, Walt Disney Productions sold to Japanese investors a twenty (20) year stream of projected yen royalties from Tokyo Disneyland. The present value of that stream of royalties, discounted at 6 percent [return required by the Japanese investors], was ¥93 billion. Disney took the yen proceeds, converted them to dollars, and invested the dollars in bonds yielding 10%. According to Disney's CFO, "In effect, we got money at a 6 percent discount rate, reinvested it at 10 percent and hedged our royalty stream against yen fluctuations - all in one transaction."

[A] At the time of the sale, the exchange rate was ¥124 = $1. Determine dollar amount did Disney realize from the sale of its yen proceeds?

[B] Show the equivalence between Disney's transaction and a currency swap. [Suggestion:  A diagram would help)

[C] Did Disney achieve the equivalent of a free lunch through its transaction?

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