2. How does the cross-currency swap hedge the long- term equity exposure in the foreign subsidiary?

McDonald's Corporation has investments in over 100 countries. It considers its equity investment in foreign subsidiaries to be at risk, subject to hedging depending on the individual country, currency, and market. British Subsidiary as an Exposure McDonald's parent company has three different pound- denominated exposures arising from ownership and operation of its British subsidiary. First, the British subsidiary has equity capital, which is a pound-denominated asset of the parent company. Second, in addition to the equity capital invested in the British subsidiary, the parent company provides intra-company debt in the form of a four-year 125 mil- lion loan. The loan is denominated in British pounds and carries a fixed 5.30% per annum interest payment. Third, the British subsidiary pays a fixed percentage of gross sales in royalties to the parent company. This too is pound-denominated. The three different exposures sum to a significant exposure problem for McDonald's.