How does the cross-currency swap hedge the long-term equity exposure in the foreign subsidiary?
A cross currency swaps is an agreement that allow two parties exchange a predetermined value of principal and interest payment between two difference currency. In this case, McDonald’s are involved in a seven years cross currency swap and this agreement requires it to make a regular pound-denominated interest payment and bullet principal repayment.
As mentioned in the case statement, McDonald’s swap agreement is using the interest payment of a loan to exchange an equal amount of loan using different currency. Therefore, in order to hedge the long-term equity exposure, we must examined the cash inflow of the US McDonald.