Coca-Cola Annual 2018 Report Summary

Coca-Cola Annual 2018 Report Summary

Introduction

Coca-Cola is a global company that has managed to acquire success since its inception. The company operates in more than 200 territories. Part of its success is because it diversifies its product portfolio. It sells various non-alcoholic drinks, not only soda, as some people often assume. The products sold by the company include sparkling soft drinks, tea, coffee, energy drinks, sports drinks, water, and enhanced water, among others. The company has also managed to build a brand that people can trust, which makes it reliable. For example, soda made by the company tastes the same every day, everywhere. When a person purchases it in a different country they visit, they are guaranteed to experience the same taste they experience when they buy the soda in their home country which is why people tend to love it. In the beverage industry, it is the leading manufacturer and distributor of non-alcoholic beverages. The company’s great achievement is that it owns four of the world’s top five non-alcoholic drinks. These drinks include Fanta, Sprite, Coca-Cola, and Diet Coke. A look at the company’s financial statement shows that the company is financially healthy. This report will focus on the company’s annual report for the year 2018 and will mainly focus on how the company manages its foreign exchange risk. Foreign exchange risk is the losses that the company can incur when it engages in an international financial transaction when a currency fluctuates. Having a plan on how to manage the currency risk can help a company safeguard itself from huge losses that can bankrupt the company.

How Coca-Cola manages foreign exchange risk

For the company to avoid any market risks such as foreign currency exchange rates, it often uses derivative financial instruments. A derivative is a contract that binds two or more parties whose value is usually based on the financial asset that the two agreed on or on a set of assets such as an index. Some of the commonly known and used derivative instruments include currency, bonds, stocks, interest rates, commodities, and market indexes. In layman’s terms, derivatives are secondary securities that base their value on primary security, which is often linked to it. Unlike other companies, Coca-Cola does not enter into derivative financial instruments for trading purposes; all the instruments are mainly used for reducing the risk for the underlying economic exposure. The company also has another policy where the fluctuation of the value of the financial instrument getting used is often offset by reciprocal changes in the value of the economic exposure the company is protecting itself against. This policy was brought by the fact that there is sometimes a high correlation between the underlying economic exposure against which the company is protecting itself and the hedging or derivative financial instrument getting used. The total notational value of the company’s foreign currency derivatives was $17,142 million and $13,057 on December 31st, 2018, and December 31st, 2017, respectively.

The company is also high in market research. It often carries out this research to enable it to forecast underlying economic exposures that can be detrimental to the company. By understanding these risks, it can better place itself at a position where it can protect itself against these risks. That said, the company often tries to forecast hazards that can happen for more than the next two years using market analysis on the previous and current market and economic trends. After understanding these risks, it often goes ahead to hedge these exposures. It can hedge exposures up to 36 months in advance. The main problem with the company is that most of its derivatives often expire in 24 months or less. Twenty-four months can seem little, but it is a lot because the company can protect itself against risks for two years at a time, after which it can acquire other financial instruments. Most of the financial instruments acquired by the company are often are straightforward. These instruments are usually bought over the counter and have liquid markets.

The company monitors its financial market risks using various objective measurement systems. One of these measurement system used is sensitivity analysis. The company uses sensitivity analysis to measure its exposure to foreign currency exchange rates, commodity prices, and interest rates. Sensitivity analysis mainly determines how to target variables get affected by the changes in the input variables. The analyst often creates a list of variables that can affect the target variable. For example, the company’s target variable is foreign currency exchange rates. It then creates variables in the market and economy in general that can affect this exchange rate. The company then looks at ways these other variables at the changes that occur on these variables and how these changes affect the target variable. For example, if the other variable getting used is inflation, the company looks at how the rise or fall of inflation can influence the exchange rate. In this analysis, it will determine whether the increase in inflation leads to the increase or decrease of the exchange rate or if the fall of the inflation leads to the increase or decrease of the exchange rate.

Coca-Cola manages its foreign currency exchange exposure on a consolidated basis. This approach allows the company to value specific exposures and takes advantage of any natural offsets, thereby reducing its exposure to market risks. In 2018, for example, the company took advantage of 72 functional currencies apart from the US dollar and managed to generate a revenue of $20,512 million for net operations outside of the United States. This strategy was effective because, by using multiple currencies, the weak currencies get backed up by the stable currencies, thereby enabling the company to safeguard itself against risks of foreign currency exchange rates.

Another strategy used by the company is to enter into forward-exchange contracts. The main advantage of entering into forward-exchange contracts is to help the company offset the earnings impact that correlates with the foreign currency fluctuations on certain liabilities and monetary assets. It also purchases foreign currency options and collars. These foreign currency options and collars help the company to hedge some of the forecasted cash flows that dominate the foreign currency. Some of the foreign currency options that the company often purchases are the euro, Japanese yen, and the British Pound Sterling. The value of the forward exchange contracts that qualified for hedge accounting as of December 31st, 2018, was $83 million, while those that did not qualify were valued at $40 million on the same date.

Conclusion

The company seems to have effective strategies in place to protect itself against risks in foreign currency exchange rates. These strategies not only help the company protect itself against these risks but also ensures that the company makes a lot of profits. The report also showed that the company protects itself against all types of market risks apart from risks on foreign currency exchange rates. These other risks include commodity prices and interest rates, among others. Protecting itself against these risks helps the company to maintain its financial health and remain at the top of the industry.