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Suppose that McDonald's overseas sales revenue in Europe totaled €10.00 billions in 2014 and is predicted to grow to €11.50 billions in 2015. The spot exchange rate was $1.20 per € in 2014 and is predicted to be $1.75 per € by the end of 2015. Show your calculations to answer each of the following questions.
1) From 2014 to 2015, what is the predicted growth rate of McDonald's European revenues in terms of euros?
2) From 2014 to 2015, what is the predicted growth rate of McDonald's European revenues in terms of dollars?
3) From 2014 to 2015, is the euro predicted to appreciate to depreciate against the dollar? What would be the rate of appreciation or depreciation? ()
4) Briefly explain why McDonald's European euro-denominated and dollar-denominated revenues present seemingly different outlooks.
5) Suppose that the forward exchange rate is currently at $1.60 per €. Suppose that McDonald's management is risk averse and is pretty much unsure about the end-of-year $/€ exchange rate, although it is predicted at $1.75 per € by the end of 2015. Explain how McDonald can hedge the exchange risk by engaging in a forward-exchange contract based on the currently quoted forward exchange rate. If so, what would be the predicted growth rate of McDonald's European dollar- denominated revenue?
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