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Economic Exposure
Most large companies attempt to minimize the risk of fluctuating
exchange rates by hedging with positions in the forex market.
Companies that do a lot of business in many countries, such as
import/export companies, are at particular risk for economic liabilities
or income in a foreign currency.
exposure.
Translation exposure does not directly affect cash flows, but some
firms are concerned about it because of its potential impact on
reported consolidated earningsslation Exposure
Accounting distortions
Our Company does not enter into derivative financial instruments for
trading purposes.The fair values of derivatives used to hedge or
modify our risks fluctuate over time, and are determined in
accordance with SFAS No. 157. Refer to Note 12. We do not view
these fair value amounts in isolation, but rather in relation to the fair
values or cash flows of the underlying hedged transactions or other
exposures. The notional amounts of the derivative financial
instruments do not necessarily represent amounts exchanged by
theparties and, therefore, are not a direct measure of our exposure to
the financial risks described above. The amounts exchanged are
calculated by reference to the notional amounts and by other terms of
the derivatives, such as interest rates, foreign currency exchange
rates or other financial indices.
THE COCA-COLA COMPANY AND SUBSIDIARIES:
HEDGING TRANSACTIONS AND DERIVATIVE
FINANCIAL INSTRUMENTS (Continued)
Our Company recognizes all derivative instruments as either assets
or liabilities in our consolidated balance sheets at fair value. The
accounting for changes in fair value of a derivative instrument
depends on whether it has been designated and qualifies as part of a
hedging relationship and, further, on the type of hedging relationship.
At the inception of the hedging relationship, the Company must
designate the instrument as a fair value hedge, a cash flow hedge, or
a hedge of a net investment in a foreign operation. This designation is
based upon the exposure being hedged. We have established strict
counterparty credit guidelines and enter into transactions only with
financial institutions of investment grade or better. We monitor
counterparty exposures daily 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. To minimize the concentration of credit risk, we
enter into derivative transactions with a portfolio of financial
institutions. The Company has master netting agreements with most
of the financial institutions that are counterparties to the derivative
instruments. These agreements allow for the net settlement of assets
and liabilities arising from different transactions with the same
counterparty. Based on these factors, we consider the risk of
counterparty default to be minimal.
Interest Rate Management
Our Company monitors our mix of fixed-rate and variable-rate debt as
well as our mix of short-term debt versus long-term debt. This
monitoring includes a review of business and other financial risks.
From time to time, in anticipation of future debt issuances, we may
manage our risk to interest rate fluctuations through the use of
derivative financial instruments. During 2008, the Company
discontinued a cash flow hedging relationship on interest rate locks,
as it was no longer probable that we would issue the long-term debt
for which these hedges were designated. As a result, the Company
reclassified a previously unrecognized gain of approximately $17
million from AOCI to earnings as a reduction to interest expense.
Additionally, during 2008 the Company recognized losses of
approximately $9 million related to the portion of cash flow hedges
deemed to be ineffective as an increase to interest expense.Any
ineffective portion, which was not significant, of these instruments
during 2007 and 2006 was immediately recognized in net income.
The following tables present the carrying values, fair values and
maturities of the Company’s derivative instruments outstanding as of
December 31, 2008 and 2007 (in millions):
Assets/(Liabilities)
Assets/(Liabilities)
Maturity
2008
12 12 2009-2010
$ (214) $ (214)
same counterparties.
104
2007
— — N/A
Commodity futures
1 1 2008
Other derivative instruments 28 28 2008
$17 $17
BANK OF AMERICA
Bank of America serves one in two U.S. households, virtually the
entire U.S. Fortune 1000 and clients around the world. We built this
company to serve customers and clients wherever and however they
choose, and to return value to shareholders.We understand that we
play an important role as an engine of growth and a partner for
success for millions of individuals, families and businesses of every
size.
As we emerge from the economic crisis of the past two years, we also
have the opportunity — and the obligation — to address a simple
question I often hear:
For the year, the company delivered $10.01 in diluted earnings per
share, an increase of 12.6 percent year to year. This was the seventh
consecutive year of double-digit earnings per share growth. In 2007,
the company developed a road map for growth with an earnings per
share objective for 2010 of $10 to $11 per share. With its
performance in 2009, the company achieved this objective one year
early.In 2009, in a difficult global economic environment, the company
continued to deliver value to its clients and strong financial results to
its investors—with profit growth driven by continued margin
expansion, expense productivity, market share gains in software and
systems and a continuing strong cash position. The company again
achieved record levels of pre-tax profit, earnings per share and cash
flow from operations—despite a decline in revenue. The financial
performance reflected the strength of the company’s global model
and the results of the strategic transformation of the business.