Below are for IBM and McDonald:

- location(s) in the annual report where the company provides disclosures related to its management of foreign exchange risk.

- types of hedging instruments the company uses and the types of hedges in which it engages.

- manner in which the company discloses the fact that its foreign exchange hedges are effective in offsetting gains and losses on the underlying items being hedged.

• IBM annual report for the fiscal year ended as on 2018 gives disclosures related to its management of foreign exchange risk under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations on page no. 66 under the head Currency rate fluctuations and on page no. 67 Foreign Currency Exchange Rate Risk.
• Types of hedging instruments the company uses are forward contracts, futures contracts, interest rate swaps, cross currency swaps and options depending on underlying exposure.
• The company issues debt in the global capital markets to fund its operations and financing business. To manage these mismatches and to reduce overall interest cost, the company may use interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt and to convert specific variable rate debt issuances into fixed-rate debt.
• The Company hedges net investments in foreign operations. A large portion of the company's foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders' equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose.

The 2018 Annual Report for McDonald's has multiple places where hedging information is mentioned. In the Summary of Significant Accounting Policies on page 38 there is a note concerning foreign currency translation, that the currency used outside the US is the local currency for that location. Pages 28-29 of the annual report contain a section on Foreign Currency Net Asset Exposures, that explains the sensitivity analysis prepared to determine the impact of hypothetical interest rate changes and foreign currency exchange rates. Page 5 of Risk factors talks about economic risks with a mention that the uncertainties of the foreign currency exchange rate influence business operations. Page 6 addresses foreign currency exchange rates in the section on how the global scope of the business risks effect the entire organization.

The types of hedging instruments used by McDonald's consist of "foreign currency forwarding to mitigate the change in fair value of certain foreign currency denominated assets and liabilities." (McDonalds Annual Report Pg 41.) Cash Flow Hedges are used to reduce the risk on the royalties received from other countries. Fair Value Hedges are used on certain liabilities. The company also has derivatives not designed for hedge accounting. Page 26 of the McDonald's Annual Report explains "Foreign Currency and Hedging Activity includes net gains or losses on certain hedges that reduce t-he exposure to variability on certain intercompany foreign currency cash flow streams."Pages 28-29 are titled Financing and Market Risk. This section mentions long term debt and how it is affected by foreign currency exchange rate fluctuations. The impact of interest rate changes and foreign currency exchange rate fluctuations are managed with "interest rate swaps and finances in the currencies in which assets are denominated." (2018 McDonald's Annual Report.) The company discloses the information about the effective of foreign exchange rates in the Summary of Significant Accounting Policies on page 38 and in the notes to the financial statements pages 28-29.

Required:

Discuss the differences noted in how IBM handles foreign exchange risk. Speculate as to why there are differences based on what has been researched about IBM and what was posted about McDonalds.