McDonald's Corporation presented a case on their British pound exposure. They have a British subsidiary that pays them royalties and loan interest in pounds. To hedge this long-term exposure, McDonald's uses a cross-currency swap that allows them to receive dollars and pay pounds, hedging the royalty payments and reducing their pound holdings over time. The swap also hedges the equity position in the subsidiary by generating pounds to offset pound-denominated capital. McDonald's and Anka should be concerned with other comprehensive income since accounting rules require marking the swap to market, which can cause large OCI swings as the swap value fluctuates.

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)
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2. 2
Bank
Bank
(5.30%)
British
Company
US Company
British
Subsidiary
$187.5 (125*5.30%)
£6.625 m
£125Mn
(L+X Million )($9.375 mn)
(Interest Payment)
$187.5 Million
(L+X)
5%(L+X)

3. 1. How does the cross currency swap effectively hedge the three
primary exposures McDonalds has relative to its British subsidiary.
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.
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4. Q2.How does the cross-currency swap hedge the long-term equity position in the
foreign subsidiary?
 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.
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5. Q3.Should Anka and McDonald's worry about
OCI(Other Comprehensive Income) ?
 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.
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6. Thank You!
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