Coca Cola 2007 Annual Report Download - page 66

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our Company uses derivative financial instruments primarily to reduce our exposure to adverse fluctuations in
interest rates and foreign currency exchange rates, commodity prices and other market risks. We do not enter into
derivative financial instruments for trading purposes. As a matter of policy, all our derivative positions are used to
reduce risk by hedging an underlying economic exposure. Because of the high correlation between the hedging
instrument and the underlying exposure, fluctuations in the value of the instruments are generally offset by reciprocal
changes in the value of the underlying exposure. The Company generally hedges anticipated exposures up to 36 months
in advance; however, the majority of our derivative instruments expire within 24 months or less. Virtually all of our
derivatives are straightforward, over-the-counter instruments with liquid markets.
Foreign Exchange
We manage most of our foreign currency exposures on a consolidated basis, which allows us to net certain
exposures and take advantage of any natural offsets. In 2007, we generated approximately 74 percent of our net
operating revenues from operations outside of the United States; therefore, weakness in one particular currency might
be offset by strengths in other currencies over time. We use derivative financial instruments to further reduce our net
exposure to currency fluctuations.
Our Company enters into forward exchange contracts and purchases currency options (principally euro and
Japanese yen) and collars to hedge certain portions of forecasted cash flows denominated in foreign currencies.
Additionally, we enter into forward exchange contracts to offset the earnings impact relating to exchange rate
fluctuations on certain monetary assets and liabilities. We also enter into forward exchange contracts as hedges of net
investments in international operations.
Interest Rates
We monitor our mix of fixed-rate and variable-rate debt, as well as our mix of short-term debt versus long-term
debt. From time to time, we enter into interest rate swap agreements to manage our mix of fixed-rate and variable-rate
debt.
Value-at-Risk
We monitor our exposure to financial market risks using several objective measurement systems, including
value-at-risk models. Our value-at-risk calculations use a historical simulation model to estimate potential future losses
in the fair value of our derivatives and other financial instruments that could occur as a result of adverse movements in
foreign currency and interest rates. We have not considered the potential impact of favorable movements in foreign
currency and interest rates on our calculations. We examined historical weekly returns over the previous 10 years to
calculate our value-at-risk. The average value-at-risk represents the simple average of quarterly amounts over the past
year. As a result of our foreign currency value-at-risk calculations, we estimate with 95 percent confidence that the fair
values of our foreign currency derivatives and other financial instruments, over a one-week period, would decline by
not more than approximately $20 million, $14 million and $9 million, respectively, using 2007, 2006 or 2005 average
fair values, and by not more than approximately $19 million and $14 million, respectively, using December 31, 2007
and 2006 fair values. According to our interest rate value-at-risk calculations, we estimate with 95 percent confidence
that any increase in our net interest expense due to an adverse move in our 2007 average or in our December 31, 2007,
interest rates over a one-week period would not have a material impact on our consolidated financial statements. Our
December 31, 2006 and 2005 estimates also were not material to our consolidated financial statements.
64