Coca Cola 2008 Annual Report Download - page 73

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 of 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 2008, we generated approximately 75 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 $44 million, $20 million and
$14 million, respectively, using 2008, 2007 or 2006 average fair values, and by not more than approximately
$30 million and $19 million, respectively, using December 31, 2008 and 2007 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 2008 average or in our December 31, 2008, interest rates over a
one-week period would not have a material impact on our consolidated financial statements. Our December 31,
2007 and 2006 estimates also were not material to our consolidated financial statements.
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