Mcdonalds Case

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 swap. As the question asks this is the hedging strategy that the company uses to avoid the rising cost of British pounds. With that said, the three primary exposures are the equity capital that the article states is a pound denominated asset, the debt loaned to the British subsidiary at a 5.3% fixed interest rate and lastly, the fixed percentage of gross sales in royalties to the parent company. The above listed exposures all account for problems for McDonalds since McDonalds has been doing cross currency hedging which is what I talked about in the beginning of this question. Even though all the points I made about McDonalds doing cross currency hedging are negative, McDonalds is a smart and profitable company and is also taking advantage of this hedging. The main advantage that I was able to find through my readings of this article is that McDonalds can actually reduce the amount of monthly payment by entering these currency swaps. Because this allows McDonalds to swap the fixed interest rate for floating interest rate, which is exactly what I talked about above in my initial example for this question. Using this swap McDonald's will be paying out Pounds Sterling and slowly reducing their holdings of the foreign currency. The article goes on to say that, “when the parent...