1 Presentation on Case of “McDonald’s Corporation’s British Pound Exposure” PRESENTED BY GROUP NO. 1, 1)ANIKET CHALKE (21) 2)DEEPAK GUPTA (25) 3)DEEPAK MADAAN (27) 4) AYUSHI AGRAWAL(19) 5)MOHIT SHRIVASTAVA (47) Bank (5.30%) Bank 2 5%(L+X) (L+X) £125Mn $187.5 (L+X Million )($9.375 mn) (Interest Payment) British Company US Company $187.5 Million British Subsidiary (125*5.30%) £6.625 m 1. How does the cross currency swap effectively hedge the three primary exposures McDonalds has relative to its British subsidiary. 3 Three Primary Exposures Equity capital Inter-company loans Royalty Payments If the loan is designated as permanent, the foreign exchange profits and losses related to the intra-company loan flow only to the cumulative translation adjustment (CTA) on the consolidated balance sheet. If it is not considered as permanent, the foreign exchange profits and losses related to the loan low directly to the parent company’s profit and loss statement. McDonald by using the seven years swap hedging model is able to receive dollars and pay out pounds. When McDonald is paying out pounds, the foreign currency that McDonald is holding will be reduced. The royalties that need to deliver back to country are being hedged to avoid more expensive payments. In conclusion, by using cross-currency swap McDonald’s corporation can hedge the British pound exposure very effectively. Q2.How does the cross-currency swap hedge the long-term equity position in the foreign subsidiary? 4 McDonald’s should use the currency swap but not future or forward contracts because the exposure of the firm faces are long-term exposure. By Using Cross currency SWAP company generating pound and converted in to dollar. And interest payment will be again change to British pound. Q3.Should Anka and McDonald's worry about OCI(Other Comprehensive Income) ? 5 Yes, OCI is essentially the normal consolidated profits of the firm plus change in retained earnings. FAS #133, requires that McDonald’s mark-to-market the value of the outstanding swap on a regular basis, which will include the gains and losses on the swap in OCI. Marking-to-market a cross currency swap will likely result in large swings in the value from period to period. 6 Thank You!
