Coca Cola 2015 Annual Report Download - page 74

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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, including a sensitivity analysis to measure our exposure to
fluctuations in foreign currency exchange rates, interest rates and commodity prices. Refer to Note 5 of 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 2015, we used 72 functional currencies and generated $23,934 million of our net operating revenues from operations outside the United States;
therefore, weaknesses in some currencies might be offset by strengths in other currencies over time. We use derivative financial instruments to further reduce
our net exposure to foreign currency fluctuations.
Our Company enters into forward exchange contracts and purchases currency options (principally euros 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 foreign currency 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 values of our foreign currency derivatives were $18,060 million and $23,553 million as of December 31, 2015 and 2014, 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 a net unrealized gain of $692 million as of December 31, 2015. At the end of 2015, we estimate that a 10 percent
weakening of the U.S. dollar would have eliminated the net unrealized gain and created an unrealized loss of $486 million. The fair value of the contracts
that do not qualify for hedge accounting resulted in a net unrealized gain of $278 million, and we estimate that a 10 percent weakening of the U.S. dollar
would have decreased the net unrealized gain to $238 million.
Interest Rates
The Company is subject to interest rate volatility with regard to existing and future issuances of debt. We monitor our mix of fixed-rate and variable-rate debt
as well as our mix of short-term debt and long-term debt. From time to time, we enter into interest rate swap agreements to manage our exposure to interest
rate fluctuations.
Based on the Company's variable-rate debt and derivative instruments outstanding as of December 31, 2015, a 1 percentage point increase in interest rates
would have increased interest expense by $252 million in 2015. However, this increase in interest expense would have been partially offset by the increase in
interest income related to higher interest rates.
The Company is subject to interest rate risk related to its investments in highly liquid securities. These investments are primarily managed by external
managers within the guidelines of the Company's investment policy. Our policy requires investments to be investment grade, with the primary objective of
minimizing the potential risk of principal loss. In addition, our policy limits the amount of credit exposure to any one issuer. We estimate that a 1 percentage
point increase in interest rates would result in a $52 million decrease in the fair value of our portfolio of highly liquid securities.
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