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FOREIGN CURRENCY MANAGEMENT
The purpose of our foreign currency hedging activities is to reduce the risk that our eventual dollar net cash inflows resulting from sales outside the United States will be adversely affected by changes in exchange rates
The Company enter into forward exchange contracts and purchase currency options (principally European currencies and Japanese yen) to hedge firm sale commitments denominated in foreign currencies. The Company also purchase currency options (principally European currencies and Japanese yen) to hedge certain anticipated sales. Premiums paid and realized gains and losses, including those on terminated contracts, if any, are included in prepaid expenses and other assets. These are recognized in income along with unrealized gains and losses, in the same period the hedged transactions are realized. Approximately $17 million and $27 million of realized losses on settled contracts entered into as hedges of firmly committed transactions that have not yet occurred were deferred on December 31, 1996 and 1995, respectively. Deferred gains/losses from hedging anticipated transactions were not material on December 31, 1996 or 1995. In the unlikely event that the underlying transaction terminates or becomes improbable, the deferred gains or losses on the associated derivative will be recorded in our income statement.
Gains and losses on derivative financial instruments that are designated and effective as hedges of net investments in international operations are included in share-owners' equity as a foreign currency translation adjustment.
The following table presents the aggregate notional principal amounts, carrying values, fair values and maturities of our derivative financial instruments outstanding on December 31, 1996 and 1995 (in millions):
Notional
Principal Carrying Fair
December 31, Amounts Values Values Maturity
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1996
Interest rate
management
Swap agreements
Assets $ 893 $ 5 $ 13 1997-2003
Liabilities 25 - 1 2002
Interest rate caps
Assets 400 1 - 1997
Foreign currency
management
Forward contracts
Assets 5 1 (2) 1997
Liabilities 2,541 (53) (42) 1997-1998
Swap agreements
Assets 398 18 12 1997-1998
Liabilities 1,086 (12) (114) 1997-2002
Purchased options
Assets 1,873 42 89 1997
Other
Assets 537 67 33 1997
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$ 7,758 $ 69 $ (10)
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Notional
Principal Carrying Fair
December 31, Amounts Values Values Maturity
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1995
Interest rate
management
Swap agreements
Assets $ 705 $ 4 $ 30 1997-2003
Liabilities 62 - (2) 2000-2002
Interest rate caps
Assets 400 2 - 1997
Foreign currency
management
Forward contracts
Assets 1,927 25 36 1996
Liabilities 554 (17) (15) 1996-1997
Swap agreements
Assets 390 17 11 1996-2000
Liabilities 1,686 (46) (262) 1996-2002
Purchased options
Assets 1,823 62 90 1996
Other
Assets 327 7 5 1996
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$ 7,874 $ 54 $ (107)
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Maturities of derivative financial instruments held on December 31, 1996, are as follows (in millions):
1997 1998 1999 2000-2003
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$ 6,037 $ 622 $ 204 $ 895
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