please solve these question out of that case as much information you have MINI-C

Question

please solve these question out of that case as much information you have

MINI-CASE McDonald's, Hoover Hedges, and Cross-Currency Swaps world's most well known and valuable brands. But as ary is now in local currency, the currency of McDonald's Corporation (NYSE: MCD) is one of the subsidiary. But the equity investment in the foreign subsid- ness environment. If the investment risks associated with is investment in more subsidiary's business,it is termed the functional currency of than 100 countries. Like most multinational firms, it con- the subsidiary, Going forward, as the exchange rate between siders its equity investment in foreign affiliates capital at the two country currencies changes the parent company's this is the predominant currency of this risk-risk of loss, nationalization, and currency valuation. equity investment is subject to foreign exchange risk McDonald's has been quite innovative in its hedging of Many multinationals have attempted to hedge this these combined currency risks over time, finding new ways equity investment exposure with what can be described as to construct old solutions-Hoover Hedges-but doing so a balance sheet hedge. Since the parent company possesses a long-term asset in the foreign currency, the company tries to hedge this by creating a matching long-term liability in the same currency. A long-term loan in the currency of the with cross-currency swaps Hoover Hedges multinational firm that establishes a foreign subsidiary foreign subsidiary has typically been used. The lo puts capital at risk, a long-time fundamental of international often structured as a bullet repayment loan, in which int Fially, when the parent company creates and est payments are made over time but the entire principal foreign is due in a single final payment at maturity. In this way, the in a foreign subsidiary it creates an asset, its estment in a foreign subsidiary, which corresponds to principal on the long-term loan acts as a match to the long iny the term equity investment equity investment on the balance sheet of the foreign 5 Thunderbird School of Global Management, Arizona State Univer t.Although McDonald's is a real company,the actors and actions in this mini-case sity, All rights reserved. This case was prepared ght © 2015,l'h eMichael H. Moffett for the purpose of classroom discussion only and not to inda are fictional

Explanation / Answer

1. The three primary exposures that McDonald’s has relative to its British subsidiary are with regards to its equity capital, its inter-company loans, and its royalty payments.

The company uses currency swaps so as to be able to change the denomination of its cash flows with regards to debt services. This enables it to fix as well as change interest rates and interest payments. Lastly the company uses swaps to reduce its cash outflow towards royalty payments.

2. The company has a seven year swap. As per the arrangements of this swap the company’s outflows are in pounds and inflows are in dollars. McDonald’s US makes interest payments as well as bullet principal repayment in pounds. This is its hedge.

The parent company has elected to designate their loan as permanently invested in the country of their foreign subsidiary. This leads to any foreign exchange gains and losses to be reported to only the consolidated balance sheet that is prepared by the foreign company.

The end result is that the subsidiary is able to swap as per their own benefit.

3. Anka and McDonald’s should worry a little about OCI because as per FAS #133 the company’s is required to mark-to-market the value of its outstanding swaps. This will include gains and losses on the swap in OCI. Thus the requirement of mark-to-market will lead to volatility in the value from one period to another period.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.