1. McDonald’s has three primary exposures relative to its British subsidiary that is effectively hedged with the use of cross currency swap. First exposure is that the equity capital which is a pound-denominated asset. Next is their intra-co 4 year, L125mil debt at a fixed annual interest rate of 5.3%. Finally, their fixed percentage gross sales royalties to the parent co. Using cross currency rate swap, McDonald’s is able to alter both the currency of denomination of cash flows in debt services and alter the fixed/floating or vice versa interest rate structure. If the company forecasts a decrease in the floating rate, they can swap with the fixed rate to decrease their interest payments. The royalties that are returned to the country are being hedged to dodge more expensive payments.

2. McDonald’s has a current swap which is a 7-year swap to receive dollars and pay pounds. The agreement requires McDonald’s in the U.S. to make regular pound interest payment and a principal repayment at swap term. The cross currency swap hedges the long term position by taking advantage of the current lower rates and hedge that against the final payment when the cost of the pound maybe higher.

3. When a parent co makes and inter/co loan, it must decide whether the loan is considered permanent or not. If it is considered to not be permanent, the forex gains and losses flow directly to the parent co.’s P&L. If the loan is deemed permanent, the forex gains and losses flow to the CTA on the consolidated BS. The intercompany account is essentially a permanent investment in the subsidiary, the gain or loss on that account will be excluded from net income. Anka shoud be concerned with OCI, as it is a component of shareholder’s