When McDonald’s regards the loan as an investment in the British subsidiary, that is to say, the loan is permanent in the subsidiary, its character is in essence equity capital and any losses and gains of foreign exchange arising from debt service just flow to the CTA account which is in the book. If McDonald’s doesn’t mean to invest the loan forever in the British subsidiary, the foreign exchange losses and gains generating from debt service will surge to the profit and loss announcement of the headquarter company itself, probably changing consolidated earnings of the company.
The cross-currency swap is a very useful instrument when a company needs to transfer the currency of the assets. Companies can solve some financial problems with the cross-currency swap. Using the cross-currency swap can absolutely hedge the equity exposures of the headquarter company. With a ordinary and concise balance sheet of the headquarter company in U.S. which expresses the nature of the exposures, the usage of the swap can be illustrated clearly (Eiteman, Stonehill and Moffett, p244). McDonald's draws a swap hedging model into consideration. The model has a length of seven years and makes the company to get dollars for payment of pounds. The swap hedging model is a cross-currency swap with no doubt. Besides, it recommends McDonald's to take payments in pounds regularly. Then, principal repayment must be made finally while the swap agreement has come to an end (Sivakumar and Mathew, 1996, pp 4-5). When McDonald's is attempting to own the cost of payment for the pound within the agreement of seven years periods, hedging happens. McDonald's hedges against locking in the dollar and rising payments of the pound in order to make the cross-currency swap more efficient. Ultimately, the principal large payment in the end involved in the swap efficiently not only hedges against outflows of the dollar’s value but also protects the company against the probability of rising costs of the pound as time passes by. In addition, it hedges against exposures in the values of the currency as well. McDonald’s thinks the great estimated payment of principal is a hedge which is against the equity investment in the British subsidiary (Brian, 2009, pp 2-3; Turnbull, 1987, pp-15-21).