A cross currency swap is an agreement between two parties to exchange of payments in different currency. One set payments is calculated on the basis of a fixed interest rate while another is calculated on the basis of a variable interest rate.
In this case, there are three primary exposures that McDonald’s has relative to its British subsidiary. The following exposures are denominated to British pound. The first exposure is the equity capital that the parent has in the British subsidiary. The second exposure is the 4 years intracompany debt provided by the parent company to its British subsidiary with a 5.
3% of fixed interest rate. The last exposure is the royalties with fixed percentage of gross sales of British subsidiary pay to the parent company. Moreover, since McDonald’s has chosen to designate the intracompany loan stated above to be permanent, therefore all the foreign exchange gain and losses will only accounted into cumulative translation adjustment account (CTA) which is one of the segment in the consolidated balance sheet.
