Coca Cola Risk Management

Coca Cola, as a global company, is exposed to several market risks such as

fluctuations in foreign exchange rates, commodity prices, interest rates which
can impact the firm especially in its financial performance. Therefore the
company regularly exercises some derivative financial instruments mostly to
minimise these exposures and reduce the market risk by hedging an underlying
economic exposure. However, the company does not take these derivative
products for trading purposes. Additionally, the hedging instruments are usually
used up to 36 months in advance and will expire within 24 months or less. The
exposure to these financial market risks then will be monitored using several
objective measurement system such as sensitivity analysis.
Foreign Currency Exchange Rate
Coca cola manages the exchange rate exposures by using a consolidated basis
which enables the management to get certain exposures and take benefit from
the natural offset. The firm uses derivative instruments such as forward
exchange contracts and buys currency options, mainly in Japanese Yen and
Euros, to lessen the companys exposure to foreign currency volatilities. In
addition, it undertakes collars to hedge a specific portion of forecasted cash flows
which also denominated in other currencies. Moreover, the forward exchange
contracts are not only exercised as hedges of net investments in global
operations but also to counteract the earnings impacts due to the fluctuations on
monetary assets and liabilities.
There are 71 functional currency rates which generated revenues of $26,235
million outside the United States in 2014. The foreign currency derivatives have
values of $23,553 million including the derivatives products that are allocated for
hedge accounting with fair value in an asset of $996 million by the end of
December 2014.
Interest Rates
The company has issued debt hence it is subject to interest rate fluctuation. The
fixed-rate and variable-rate are monitored both in short-term and long-term debt
from time to time by entering into interest rate swap agreements to handle the
exposure of this interest rate volatility. In 2014, if the interest rate increased a
one percentage point, it would have risen the interest expense by $148 million.
However, the increase in the interest expense will be offset by the increase in
interest income related to higher interest rates.
In addition, the interest rate risk also occurs in the investments of highly liquid
securities. The external managers within the guidelines of the investment policy
have managed these type of investments because the company wants these
investments to be an investment grade to reduce the potential risk of principal
loss. Moreover, the policy also limits the amount of credit exposure and
estimates that a one percentage point increase in interest rates will result in a
$57 million decrease in the fair market value of the portfolio.

Commodity Prices
The commodity price, related to the purchase of sweeteners, juices, metals, PET,
and fuels, is also fluctuated. The company manages this commodity risk by
conducting a supplier pricing agreement which will allow the firm to have a
purchase price for certain inputs that will be used in manufacturing and
distribution. Furthermore, the company also uses derivative financial products to
control the exposure of this risk. Even though some of these derivatives
instruments do not qualify for hedge accounting, they can help the firm to
mitigate the price risk in the purchases of materials for manufacturing process
and the fuel for operating the vehicle fleet. Thus, it can be concluded that those
instruments are effective economic hedges.
On the other hand, the commodity derivatives which qualify for hedge
accounting have notional values of $9 million in 2014. The change in fair value of
these contracts, assuming a ten percent decrease in underlying commodity
prices, might have resulted a net loss of $2 million. In contrast, the commodity
derivatives which do not qualify for hedge accounting have the notional values of
$816 million in 2014 and the potential change in fair value with the same
assumption of a ten percent decrease would have risen the unrealised losses to
$205 million.