Coca Cola 2011 Annual Report Download - page 78

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our Company uses derivative financial instruments primarily to reduce our exposure to adverse fluctuations in foreign currency
exchange rates, interest 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.
We monitor our exposure to financial market risks using several objective measurement systems. In prior years, the Company
primarily used the value at risk methodology for its quantitative and qualitative disclosures about market risk. However, with the
Company’s acquisition of CCE’s North American business in 2010, and the related changes to our consolidated balance sheet, the
Company has provided a sensitivity analysis to measure our exposure to fluctuations in foreign currency exchange rates, interest
rates and commodity prices. Refer to Note 5 of the Notes to Consolidated Financial Statements for additional information about
our hedging transactions and derivative financial instruments.
Foreign Currency Exchange Rates
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 2011, we generated $27.8 billion of our net operating revenues from operations outside 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 related 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.
The total notional value of our foreign currency derivatives was $10.5 billion and $6.3 billion as of December 31, 2011 and 2010,
respectively. This total includes derivative instruments that are designated and qualify for hedge accounting as well as economic
hedges. The fair value of the contracts that qualify for hedge accounting resulted in an asset of $129 million as of December 31,
2011. At the end of 2011, we estimate that an unfavorable 10 percent change in the exchange rates would have eliminated the net
unrealized gain and created an unrealized loss of $490 million. The fair value of the contracts that do not qualify for hedge
accounting resulted in a liability of $87 million, and we estimate that an unfavorable 10 percent change in rates would have
increased our net losses by $336 million. All losses were offset by changes in the underlying hedged item, resulting in no net
material impact on earnings.
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.
Based on the Company’s variable-rate debt and derivative instruments outstanding as of December 31, 2011, a 1 percentage point
increase in interest rates would have increased interest expense by $191 million in 2011. However, this increase in interest expense
would have been partially offset by the increase in interest income related to higher interest rates.
Commodity Prices
The Company is subject to market risk with respect to commodity price fluctuations, principally related to our purchases of
aluminum and plastic, sweeteners, and energy. Whenever possible, we manage our exposure to commodity risks primarily through
the use of supplier pricing agreements that enable us to establish the purchase prices for certain inputs that are used in our
manufacturing and distribution business. We also use derivative financial instruments to manage our exposure to commodity risks
at times. Certain of these derivatives do not qualify for hedge accounting, but they are effective economic hedges that help the
Company mitigate the price risk associated with the purchases of materials used in our manufacturing processes and the fuel used
to operate our extensive vehicle fleet.
Open commodity derivatives that qualify for hedge accounting had a notional value of $26 million as of December 31, 2011. These
contracts had a fair value of $1 million. The potential change in fair value of these commodity derivative instruments, assuming a
10 percent decrease in underlying commodity prices, would have eliminated the net unrealized gain and created an unrealized loss
of $1 million.
Open commodity derivatives that do not qualify for hedge accounting had a notional value of $1,165 million as of December 31,
2011. These contracts had a fair value of $7 million. The potential change in fair value of these commodity derivative instruments,
assuming a 10 percent decrease in underlying commodity prices, would have eliminated our net unrealized gain and created an
unrealized loss of $78 million.
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