Mcdonalds Case Essay

792 words - 4 pages

How does the cross currency swap effectively hedge the three primary exposures McDonalds has relative to its British Subsidiary.

1. Cross currency swap is a designed contract that allows people to swap the currencies of debt obligations. As the article alludes to McDonalds must swap the pound fixed interest rate and adopt floating interest rate from the US. This swap completely depends on the expected floating rate. For example, if a company expects a future floating rate to decrease then it’s in the companies best interest to swap fixed interest rate for floating interest rate, if the floating rate is not expected to do this then it would not be in the companies best interest to do the ...view middle of the document...

The article goes on to say that, “when the parent company makes an intra company loan to the British subsidiary, it must designate according to the US accounting and tax law practices.

2. The article talks about McDonald’s seven year model that allows McDonalds to receive dollars for payment of pounds. This is a classic example of a cross currency swap that I talked about in question 1. Hedging however actually occurs as McDonalds is trying to lock in the cost over a seven year period. This is what we talked about in class and can actually be a contractual agreement so McDonalds can be sure that the price will not change over the seven years. Once McDonalds can lock this cost in they will hedge against the rising costs of paying for the pound while locking in the dollar. This in turn should make the cross currency swap more effective. The Hedge will protect McDonalds against the possibility of rising costs of the pound over this allotted period of time while also hedging against the losses in the value of the dollar during this time as well. In this example it is in McDonalds best interest to get that cost lock in so they don’t have to worry about it changing in the coming years.

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