Coca Cola 2010 Annual Report Download - page 113

Credit Risk Associated with Derivatives
We have established strict counterparty credit guidelines and enter into transactions only with financial institutions of
investment grade or better. We monitor counterparty exposures regularly 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. In
addition, the Company’s master netting agreements reduce credit risk by permitting the Company to net settle for
transactions with the same counterparty. To minimize the concentration of credit risk, we enter into derivative
transactions with a portfolio of financial institutions. Based on these factors, we consider the risk of counterparty
default to be minimal.
Cash Flow Hedging Strategy
The Company uses cash flow hedges to minimize the variability in cash flows of assets or liabilities or forecasted
transactions caused by fluctuations in foreign currency exchange rates, commodity prices or interest rates. The changes
in the fair values of derivatives designated as cash flow hedges are recorded in AOCI and are reclassified into the line
item in the consolidated income statement in which the hedged items are recorded in the same period the hedged items
affect earnings. The changes in fair values of hedges that are determined to be ineffective are immediately reclassified
from AOCI into earnings. The Company did not discontinue any cash flow hedging relationships during the years ended
December 31, 2010 and 2009. The maximum length of time over which the Company hedges its exposure to future cash
flows is typically three years.
The Company maintains a foreign currency cash flow hedging program to reduce the risk that our eventual U.S. dollar
net cash inflows from sales outside the United States and U.S. dollar net cash outflows from procurement activities will
be adversely affected by changes in foreign currency exchange rates. We enter into forward contracts and purchase
foreign currency options (principally euros and Japanese yen) and collars to hedge certain portions of forecasted cash
flows denominated in foreign currencies. When the U.S. dollar strengthens against the foreign currencies, the decline in
the present value of future foreign currency cash flows is partially offset by gains in the fair value of the derivative
instruments. Conversely, when the U.S. dollar weakens, the increase in the present value of future foreign currency cash
flows is partially offset by losses in the fair value of the derivative instruments. The total notional value of derivatives
that have been designated and qualify for the Company’s foreign currency cash flow hedging program as of
December 31, 2010 and 2009, was approximately $3,968 million and $3,679 million, respectively.
The Company has entered into commodity futures contracts and other derivative instruments on various commodities to
mitigate the price risk associated with forecasted purchases of materials used in our manufacturing process. The
derivative instruments have been designated and qualify as part of the Company’s commodity cash flow hedging
program. The objective of this hedging program is to reduce the variability of cash flows associated with future
purchases of certain commodities. The total notional value of derivatives that have been designated and qualify under
this program as of December 31, 2010 and 2009, was approximately $28 million and $26 million, respectively.
Our Company monitors our mix of short-term debt and long-term debt. From time to time, we manage our risk to
interest rate fluctuations through the use of derivative financial instruments. The Company had no outstanding
derivative instruments under this hedging program as of December 31, 2010 and 2009.
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