TERM PAPER

OF

INTERNATIONAL FINANCING MANAGEMENT

TOPIC: -

Managing Economic Exposure

And Translation Exposure

What Does Economic Exposure Mean?

An exposure to fluctuating exchange rates, which affects a company's

earnings, cash flow and foreign investments. The extent to which a
company is affected by economic exposure depends on the specific
characteristics of the company and its industry.

Economic Exposure
Most large companies attempt to minimize the risk of fluctuating
exchange rates by hedging with positions in the forex market.
Companies that do a lot of business in many countries, such as
import/export companies, are at particular risk for economic liabilities
or income in a foreign currency.
exposure.

What Does Translation Exposure Mean?

The risk that a company's equities, assets, liabilities or income will

change in value as a result of exchange rate changes. This
occurs when a firm denominates a portion of its equities, assets,

 To explain how an MNC’s economic exposure can be hedged;

and

 To explain how an MNC’s translation exposure can be hedged.

The economic impact of currency exchange rates on us is complex

because such changes are often linked to variability in real growth,
inflation, interest rates, governmental actions, and other factors.
These changes, if material, can cause us to adjust our financing and
operating strategies.

• Use of the Income Statement to an MNC can determine its

exposure by assessing the sensitivity of its cash inflows and
outflows to various possible exchange rate scenarios.

• The MNC can then reduce its exposure by restructuring its

operations to balance its exchange-rate-sensitive cash flows.

Note that computer spreadsheets are often used to expedite the

analysis Assess Economic ExposureManaging

Madison Inc.’s Economic Exposure

 • Madison’s earnings before taxes is inversely related to the
Canadian dollar’s strength, since the higher expenses more
than offset the higher revenue when the Canadian dollar
strengthens.

Madison may reduce its exposure by increasing Canadian sales,

reducing orders of Canadian materials, and borrowing less in
Canadian dollars

• How Restructuring Can Restructuring to reduce economic

exposure involves shifting the sources of costs or revenue to
other locations in order to match cash inflows and outflows in
foreign currencies.

• The proposed structure is then evaluated by assessing the

sensitivity of its cash inflows and outflows to various possible
exchange rate scenarios.

• Reduce HedgWhen an MNC has fixed assets (such as buildings

or machinery) in a foreign country, the cash flows to be
received from the sale of these assets is subject to exchange
rate risk.

• A sale of fixed assets can be hedged by creating a liability that

matches the expected value of the assets at the point in the
future when they will be sold.

Exposure to Fixed Assets Economic Exposure

• Translation exposure results when an MNC translates each

subsidiary’s financial data to its home currency for
consolidated financial reporting.

Translation exposure does not directly affect cash flows, but some
firms are concerned about it because of its potential impact on
reported consolidated earningsslation Exposure

Use of Forward Contracts to Hedge Translation Exposure

To hedge translation exposure, forward or futures contracts can be

used. Specifically, an MNC may sell the currency that its foreign
subsidiary receive as earnings forward, thus creating an offsetting
cash outflow in that currency

Use of Forward Contracts to Hedge Translation Exposure

Example:

¤ A U.S.-based MNC has a British subsidiary.

¤ The forecasted British earnings of £20 million (to be

entirely reinvested) will be translated at the weighted
average £ value over the year.

¤ To hedge this expected earnings, the MNC sells £20

million one year forward.

¤ If the £ depreciates, the gain generated from the forward

contract position will help to offset the translation loss.
Limitations of
Hedging Translation Exposure

 Inaccurate earnings forecasts

 Inadequate forward contracts for some currencies

 Accounting distortions

¤ Translation gains/losses are based on the average

exchange rate (which is unlikely to be the same as the
forward rate).

¤ Translation losses are also not tax deductible.

 Increased transaction exposure

¤ If the foreign currency appreciates during the fiscal year,

the transaction loss generated by a forward contract
position will somewhat offset the translation gain.

¤ The translation gain is simply a paper gain, while the loss

resulting from the hedge is a real loss.
ANNUAL REPORT OF 3 MNC COMPANIES & HOW
THEY MANAGE ECONOMIC TRANSATION AND
TRANSLATION EXPOSURE THROUGH HEDGING
COCACOLA
The Coca-Cola Company is the largest manufacturer, distributor and
marketer of nonalcoholic beverage concentrates and syrups in the
world. Finished beverage products bearing our trademarks, sold in
the United States since 1886, are now sold in more than 200
countries. Along with Coca-Cola, which is recognized as
theworld’s most valuable brand, we market four of the
world’s top five nonalcoholic sparkling brands, including
Diet Coke, Fanta and Sprite. In this report, the
terms ‘‘Company,’’ ‘‘we,’’ ‘‘us’’ or ‘‘our’’ mean
The Coca-Cola
Company and all entities included in our consolidated financial
statements.Our business is nonalcoholic beverages—principally
sparkling beverages, but also a variety of stillbeverages. We
manufacture beverage concentrates and syrups, which we sell to
bottling and canning operations,fountain wholesalers and some
fountain retailers, as well as finished beverages, which we sell
primarily todistributors. Our Company owns or licenses nearly 500
brands, including diet and light beverages, waters,enhanced waters,
juices and juice drinks, teas, coffees, and energy and sports drinks. In
addition, we haveownership interests in numerous beverage joint
ventures, bottling and canning operations, although most of these
operations are independently owned and managed. We were
incorporated in September 1919 under the laws of the State of
Delaware and succeeded to the business of a Georgia corporation
with the same name that had been organized in 1892.
Our Company is one of numerous competitors in the commercial
beverages market. Of the approximately 54 billion beverage servings
of all types consumed worldwide every day, beverages bearing
trademarks owned byor licensed to us account for approximately 1.6
billion.

We believe that our success depends on our ability to connect with

consumers by providing them with awide variety of choices to meet
their desires, needs and lifestyle choices. Our success further
depends on the ability of our people to execute effectively, every day.

Our goal is to use our Company’s assets—our brands, financial

strength, unrivaled distribution system,global reach and the talent and
strong commitment of our management and associates—to become
more competitive and to accelerate growth in a manner that creates
value for our shareowners.
HEDGING TRANSACTIONS AND DERIVATIVE FINANCIAL
INSTRUMENTS

When deemed appropriate, our Company uses derivative financial

instruments primarily to reduce our exposure to adverse fluctuations
in interest rates and foreign currency exchange rates, commodity
prices andother market risks. The Company formally designates and
documents the financial instrument as a hedge of a specific
underlying exposure, as well as the risk management objectives and
strategies for undertaking the hedge transactions. The Company
formally assesses, both at the inception and at least quarterly
thereafter, whether thefinancial instruments that are used in hedging
transactions are effective at offsetting changes in either the fair value
or cash flows of the related underlying exposure. Because of the high
degree of effectiveness between the hedging instrument and the
underlying exposure being hedged, fluctuations in the value of the
derivative instruments are generally offset by changes in the fair
values or cash flows of the underlying exposures being hedged. Any
ineffective portion of a financial instrument’s change in fair value is
immediately recognized in earnings. Virtually all of our derivatives are
straightforward over-the-counter instruments with liquid markets.

Our Company does not enter into derivative financial instruments for
trading purposes.The fair values of derivatives used to hedge or
modify our risks fluctuate over time, and are determined in
accordance with SFAS No. 157. Refer to Note 12. We do not view
these fair value amounts in isolation, but rather in relation to the fair
values or cash flows of the underlying hedged transactions or other
exposures. The notional amounts of the derivative financial
instruments do not necessarily represent amounts exchanged by
theparties and, therefore, are not a direct measure of our exposure to
the financial risks described above. The amounts exchanged are
calculated by reference to the notional amounts and by other terms of
the derivatives, such as interest rates, foreign currency exchange
rates or other financial indices.
THE COCA-COLA COMPANY AND SUBSIDIARIES:
HEDGING TRANSACTIONS AND DERIVATIVE
FINANCIAL INSTRUMENTS (Continued)
Our Company recognizes all derivative instruments as either assets
or liabilities in our consolidated balance sheets at fair value. The
accounting for changes in fair value of a derivative instrument
depends on whether it has been designated and qualifies as part of a
hedging relationship and, further, on the type of hedging relationship.
At the inception of the hedging relationship, the Company must
designate the instrument as a fair value hedge, a cash flow hedge, or
a hedge of a net investment in a foreign operation. This designation is
based upon the exposure being hedged. We have established strict
counterparty credit guidelines and enter into transactions only with
financial institutions of investment grade or better. We monitor
counterparty exposures daily and review any downgrade in credit
rating immediately. If a downgrade in the credit rating of a
counterparty were to occur, we have provisions requiring collateral in
the form of U.S. government securities for substantially all of our
transactions.To mitigate presettlement risk, minimum credit standards
become more stringent as the duration of the derivative financial
instrument increases. To minimize the concentration of credit risk, we
enter into derivative transactions with a portfolio of financial
institutions. The Company has master netting agreements with most
of the financial institutions that are counterparties to the derivative
instruments. These agreements allow for the net settlement of assets
and liabilities arising from different transactions with the same
counterparty. Based on these factors, we consider the risk of
counterparty default to be minimal.
Interest Rate Management
Our Company monitors our mix of fixed-rate and variable-rate debt as
well as our mix of short-term debt versus long-term debt. This
monitoring includes a review of business and other financial risks.
From time to time, in anticipation of future debt issuances, we may
manage our risk to interest rate fluctuations through the use of
derivative financial instruments. During 2008, the Company
discontinued a cash flow hedging relationship on interest rate locks,
as it was no longer probable that we would issue the long-term debt
for which these hedges were designated. As a result, the Company
reclassified a previously unrecognized gain of approximately $17
million from AOCI to earnings as a reduction to interest expense.
Additionally, during 2008 the Company recognized losses of
approximately $9 million related to the portion of cash flow hedges
deemed to be ineffective as an increase to interest expense.Any
ineffective portion, which was not significant, of these instruments
during 2007 and 2006 was immediately recognized in net income.

Foreign Currency Management

The purpose of our foreign currency hedging activities is to reduce

the risk that our eventual U.S. dollar netcash inflows resulting from
sales outside the United States will be adversely affected by changes
in foreign currency exchange rates.

We enter into forward exchange contracts and purchase foreign

currency options (principally euro and Japanese yen) and collars to
hedge certain portions of forecasted cash flows denominated in
foreign currencies. The effective portion of the changes in fair value
for these contracts, which have been designated as foreign currency
cash flow hedges, was reported in AOCI and reclassified into
earnings in the same financial statement line item and in the same
period or periods during which the hedged transaction affects
earnings.
The Company did not discontinue any foreign currency cash flow
hedging relationships during the years ended December 31,2008,
2007 and 2006. Any ineffective portion, which was not significant in
2008, 2007 or 2006, of the change in the fair value of these
instruments was immediately recognized in net income.

THE COCA-COLA COMPANY AND SUBSIDIARIES

HEDGING TRANSACTIONS AND DERIVATIVE
FINANCIAL INSTRUMENTS
Additionally, the Company enters into forward exchange contracts
that are effective economic hedges and are not designated as
hedging instruments under SFAS No. 133. These instruments are
used to offset theearnings impact relating to the variability in foreign
currency exchange rates on certain monetary assets and liabilities
denominated in nonfunctional currencies. Changes in the fair value of
these instruments are immediately recognized in earnings in the line
item other income (loss)—net in our consolidated statements
ofincome to offset the effect of remeasurement of the monetary
assets and liabilities.

The Company also enters into forward exchange contracts to hedge

its net investment position in certain major currencies. Under SFAS
No. 133, changes in the fair value of these instruments are
recognized in foreign currency translation adjustment, a component of
AOCI, to offset the change in the value of the net investment being
hedged. For the years ended December 31, 2008, 2007 and 2006,
we recorded net gain (loss) in foreigncurrency translation adjustment
related to those instruments of approximately $3 million, $(7) million
and$3 million, respectively.Commodities.
The Company enters into commodity futures and other derivative
instruments to mitigate exposure to fluctuations in commodity prices
and other market risks. We purchase commodity futures to hedge
forecasted cash flows related to future purchases of certain
commodities. The effective portion of the changes in fair value for
these contracts, which have been designated as commodity cash flow
hedges, are reported in AOCI and reclassified into earnings in the
same financial statement line item and in the same period or periods
during which the hedged transaction affects earnings. TheCompany
did not discontinue any commodity cash flow hedging relationships
during the years ended December 31, 2008, 2007 and 2006. Any
ineffective portion, which was not significant in 2008, 2007 or 2006, of
the change in the fair value of these instruments was immediately
recognized in net income.

The following tables present the carrying values, fair values and
maturities of the Company’s derivative instruments outstanding as of
December 31, 2008 and 2007 (in millions):

Carrying Values Fair Values

Assets/(Liabilities)

Assets/(Liabilities)

Maturity

2008

Foreign currency forward contracts

$ (124) $ (124) 2009-2010

Foreign currency options and collars

12 12 2009-2010

Interest rate locks

(43) (43) 2009

Commodity futures

(42) (42) 2009-2010

Other derivative instruments

(17) (17) 2009

$ (214) $ (214)

Does not include the impact of approximately $8 million of cash

collateral held or placed with the

same counterparties.

104

THE COCA-COLA COMPANY AND SUBSIDIARIES

HEDGING TRANSACTIONS AND DERIVATIVE FINANCIAL

INSTRUMENTS

Carrying Values Fair Values

Assets/(Liabilities) Assets/(Liabilities) Maturity

2007

Foreign currency forward contracts $ (58) $ (58) 2008-2009

Foreign currency options and collars 46 46 2008

Interest rate locks

— — N/A

Commodity futures

1 1 2008
Other derivative instruments 28 28 2008

$17 $17

The Company estimates the fair values of its derivatives based on

quoted market prices or pricing models using current market rates,
and records them as prepaid expenses and other assets or accounts
payable andaccrued expenses in our consolidated balance sheets.
The amounts recorded reflect the effect of legally enforceable master
netting agreements that allow the Company to settle positive and
negative positions and cash collateral held or placed with the same
counterparties. As of December 31, 2008, we had approximately$5
million reflected in prepaid expenses and other assets and $211
million reflected in accounts payable and accrued expenses.

BANK OF AMERICA
Bank of America serves one in two U.S. households, virtually the
entire U.S. Fortune 1000 and clients around the world. We built this
company to serve customers and clients wherever and however they
choose, and to return value to shareholders.We understand that we
play an important role as an engine of growth and a partner for
success for millions of individuals, families and businesses of every
size.

As we emerge from the economic crisis of the past two years, we also
have the opportunity — and the obligation — to address a simple
question I often hear:

“What is Bank of America doing to make financial services better?”

It’s a good question. My answer is, we’re working to improve our

ability to support the financial health of all those we serve. To provide
financial solutions that are clearly explained and easily understood.
To take our seat at the table with policy-makers at every level and
help create a financial system that supports economic growth and
financial stability. And to do all this through a business model that
generates attractive returns for you — our shareholders.

Interest rate and foreign exchange derivative contracts are utilized in

our Accumulated OCI includes $1.5 billion in after-tax gains at ALM
activities and serve as an efficient tool to manage our interest rate
December 31, 2009, including $628 million of net unrealized losses
and foreign exchange risk. We use derivatives to hedge the
variability in related to AFS debt securities and $2.1 billion of net
unrealized gains cash flows or changes in fair value on our balance
sheet due to interest related to AFS marketable equity securities.
Total market value of the AFS rate and foreign exchange
components. For additional information on our debt securities was
$301.6 billion at December 31, 2009 with a hedging activities, see

Derivatives to the Consolidated Financial weighted-average duration

of 4.5 years and primarily relates to our MBS Statements. portfolio.

Our interest rate contracts are generally non-leveraged generic

interest.The amount of pre-tax accumulated OCI loss related to AFS
debt secu-rate and foreign exchange basis swaps, options, futures
and forwards. In rites decreased by $8.3 billion during 2009 to $1.0
billion. For those addition, we use foreign exchange contracts,
including cross-currency securities that are in an unrealized loss
position, we have the intent and interest rate swaps and foreign
currency forward contracts, to mitigate the ability to hold these
securities to recovery and it is more likely than not foreign exchange
risk associated with foreign currency-denominated that we will not be
required to sell the securities prior to recovery. assets and liabilities.
Table 46 reflects the notional amounts, fair value, We recognized
$2.8 billion of other-than-temporary impairment losses weighted-
average receive fixed and pay fixed rates, expected maturity and
through earnings on AFS debt securities during 2009 compared to
$3.5 estimated duration of our open ALM derivatives at December 31,
2009 billion during 2008. We also recognized $326 million of other-
than- and 2008. These amounts do not include derivative hedges on
our net temporary impairment losses on AFS marketable equity
securities during investments in consolidated foreign operations and
MSRs. 2009 compared to $661 million during 2008. Changes to the
composition of our derivatives portfolio during 2009 ,The impairment
of AFS debt and marketable equity securities is based reflect actions
taken for interest rate and foreign exchange rate risk on a variety of
factors, including the length of time and extent to which management.
The decisions to reposition our derivatives portfolio are the market
value has been less than cost; the financial condition of the based
upon the current assessment of economic and financial conditions
issuer of the security and its ability to recover market value; and our
including the interest rate environment, balance sheet composition
and intent and ability to hold the security to recovery. Based on our
evaluation trends, and the relative mix of our cash and derivative
positions. The of the above and other relevant factors, and after
consideration of the notional amount of our option positions increased
to $6.5 billion at losses described in the paragraph above, we do not
believe that the AFS December 31, 2009 from $5.0 billion at
December 31, 2008. Changes debt and marketable equity securities
that are in an unrealized loss posi- in the levels of the option positions
were driven by swaptions acquired as tion at December 31, 2009 are
other-than-temporarily impaired. a result of the Merrill Lynch
acquisition. Our interest rate swap positions We adopted new
accounting guidance related to the recognition and (including foreign
exchange contracts) were a net receive fixed position of presentation
of other-than-temporary impairment of debt securities as of $52.2
billion at December 31, 2009 compared to a net receive fixed
,January 1, 2009. As prescribed by the new guidance, at December
31, position of $50.3 billion at December 31, 2008.
Changes in the notional 2009, we recognized the credit component of
other-than-temporary levels of our interest rate swap position were
driven by the net addition of 96 Bank of America 2009 ,$104.4 billion
in pay fixed swaps, $83.4 billion in U.S. dollar

The following table includes derivatives utilized in our ALM activities

receive fixed swaps and the net addition of $22.9 billion in including
those designated as accounting and economic hedging instru-foreign
currency-denominated receive fixed swaps.The fair value of net ALM
contracts increased $5.8 billion to our foreign exchange basis swaps
was $122.8 billion and $54.6 billion at gain of $12.3 billion at
December 31, 2009 from a gain of $6.4 billion at December 31, 2009
and 2008. The $42.9 billion increase in same-December 31, 2008.
The increase was primarily attributable to changes currency basis
swap positions was primarily due to the acquisition of in the value of
U.S. dollar-denominated receive fixed interest rate swaps Merrill
Lynch. Our futures and forwards net notional position, which of $1.9
billion, foreign exchange basis swaps of $1.4 billion, pay fixed reflects
the net of long and short positions, was a long position of $10.6
interest rate swaps of $1.2 billion, foreign exchange contracts of
$1.1billion compared to a short position of $8.8 billion at December
31,billion, option products of $174 million and same-currency basis
swaps of2008.$107 million. The increase was partially offset by a loss
from changes in the value of futures and forward rate contracts of $66
million.
IBM

INTERNATIONAL BUSINESS MACHINE

The company has exited commoditizing businesses and remixed its

portfolio to higher value areas through organic investments and
acquisitions. This shift to higher value areas drives a more profitable
mix and enables the company to better meet clients’ needs. In
addition, the focus on global integration has improved productivity
and efficiency. The company’s ongoing initiatives have reduced the
fixed cost base and improved the operational balance point—
generating more profit for each dollar of revenue. The strong profit
and cash base has enabled the company to make significant
investments for growth and return capital to shareholders. Key areas
of investment include Smarter Planet solutions, business analytics,
growth market opportunities and new computing models such as
cloud computing. The strategic transformation of the company has
enabled the company to deliver strong financial performance since
the last recession in 2002, including the difficult environment in 2008
and 2009, and has positioned the business for the future.

For the year, the company delivered $10.01 in diluted earnings per
share, an increase of 12.6 percent year to year. This was the seventh
consecutive year of double-digit earnings per share growth. In 2007,
the company developed a road map for growth with an earnings per
share objective for 2010 of $10 to $11 per share. With its
performance in 2009, the company achieved this objective one year
early.In 2009, in a difficult global economic environment, the company
continued to deliver value to its clients and strong financial results to
its investors—with profit growth driven by continued margin
expansion, expense productivity, market share gains in software and
systems and a continuing strong cash position. The company again
achieved record levels of pre-tax profit, earnings per share and cash
flow from operations—despite a decline in revenue. The financial
performance reflected the strength of the company’s global model
and the results of the strategic transformation of the business.

(IBM or the company) 2009 Annual Report includes the Management

Discussion, the Consolidated Financial Statements and the Notes to
the Consolidated Financial Statements.

In 2009, the company’s revenue decreased 7.6 percent as reported

and 5.3 percent adjusted for currency. In the first nine months of
2009, revenue decreased 10.6 percent as reported and 5.3 percent
adjusted for currency. This currency impact reversed in the fourth
quarter, as revenue increased 0.8 percent as reported and declined
5.5 percent adjusted for currency, driven from the company’s
operations in currencies other than the U.S. dollar. The company
maintains currency hedging programs for cash planning purposes
which mitigate, but do not eliminate, the volatility of currency impacts
on the company’s financial results. In addition to the translation of
earnings, the impact of currency changes also may affect the
company’s pricing and sourcing actions. For example, the company
may procure components and supplies in multiple functional
currencies and sell products and services in other currencies. The
company believes that some of these currency-based changes in cost
impact the price charged to clients. However, the company estimates
that the effect of currency, before taking pricing or sourcing actions
into account, and net of hedging activity, had no more than a $0.09
impact on earnings per share growth in 2009.
Derivatives

All derivatives are recognized in the Consolidated Statement of

Financial Position at fair value and are reported in prepaid expenses
and other current assets, investments and sundry assets, other
accrued expenses and liabilities or other liabilities. Classification of
each derivative as current or noncurrent is based upon whether the
maturity of the instrument is less than or greater than 12 months. To
qualify for hedge accounting, the company requires that the
instruments be effective in reducing the risk exposure that they are
hedge cash flows, hedge effectiveness criteria also require that it be
probable that the underlying transaction will occur. Instruments that
meet established accounting criteria are formally designated as
hedges. These criteria demonstrate that the derivative is expected to
be highly effective at offsetting changes in fair value or cash flows of
the underlying exposure both at inception of the hedging relationship
and on an ongoing basis. The method of assessing hedge
effectiveness and measuring hedge ineffectiveness is formally
documented at hedge inception. The company assesses hedge
effectiveness and measures hedge ineffectiveness at least quarterly
throughout the designated hedge period.