ACCOUNTING ESSAY代写:Generally

Keywords:ACCOUNTING ESSAY代写

Generally, a cross currency swap is part of a currency swap which is used to totally hedge a fixed rate loan accompanying with interest rate hedge and a combined currency, it is very flexible. Besides, cross currency swap is just a contract that can swap currencies which have debt service obligation (Eiteman, Stonehill, & Moffett, p.245). For example, McDonald’s needs to swap pound denominated fixed interest rate. It also want to accept floating interest rate from the headquarter in US. Whether the company has to reach swap agreement rests on the projected floating rate (Wolfgang, 2005, pp 1-2). When a company predicts that the floating rate is going to decrease, thus it is most proper to swap fixed for floating. As a result, McDonald’s will pay less for the interest payment because of the cross currency swap. In addition, during the seven years period, using the swap, the company should pay pounds and receive dollars. This is the hedging strategy the company uses to avoid the increasing exposure of British pounds (Flavell, 2002, pp12-23; Bank of England, 2004, pp1-2).
 
Right now, the British subsidiary of McDonald's is expecting a fixed interest rate which is denominated in the pound. By using a cross currency swap, the subsidiary can be divorced from the fixed interest rate. Besides, it can accept the floating interest rate from its headquarter in US. Thus,they are taking part in the swap of floating for fixed. According to the mini case, at present, McDonald’s headquarter are accompanied with three totally aparted exposures denominated in the pound due to the running of British subsidiary. The first one is the equity capital which the headquarter company in the U.S. has in the British subsidiary. It is a pound denominated asset now. The second one is the debt of £ 125 million loaned to the British subsidiary. The fixed interest of the loan is 5.30% per annum. The third one is the percentage of gross sales in royalties with a fixed rate to the headquarter companies. The three exposures lead to a big amount of problems for McDonald’s as it has been hedging with a method of entering in a cross-currency sterling swap between U.S dollar and British pound. With these exposures included, the U.S. Accounting practices is informed of the persistence of the loan taken inside the company.

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