Paper
On
Transaction Exposure
Of
Coca-Cola Co. & Mercedes Benz
By
Date
Running Head: Transaction
Exposure
1
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Finance Work Assignment for Transaction Exposure, Study notes of Finance
Finance Work Assignment for Transaction Exposure
Typology: Study notes
2017/2018
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Paper
On
Transaction Exposure
Of
Coca-Cola Co. & Mercedes Benz
By
Date
Running Head: Transaction
Exposure
Transaction Exposure:
Transaction Exposure is the exposure to which a company is exposed to when it is involved in international trade. It is the risk which is faced by these companies dealing in foreign trade in which the risk arises when they are involved in to financial obligations and the change in the currency exchange rates can create potential losses for them. This risk of losses to which a company is exposed to due to the fluctuating exchange rates for the companies involving in the foreign trade is referred to as transaction exposure.
Coca-Cola Co:
The Coca Cola Company is exposed with transaction exposure due to their dealing in foreign exchange where by the subsidiaries of the company hold monetary assets and has liabilities which are denominated in foreign currencies that are functional currency of that specific subsidiary. The company Coca Cola is primarily dealing in and is exposed to the foreign exchange exposures in Euros, US Dollars (Kim & Kim, 2014).
The company uses forward contracts in order to mitigate the transaction exposures. It is depicted from the mention of the fair value of the forward contracts in the annual report of the company. Other than this, the company Coca Cola also uses options which are reported at their fair values as the value determined by the application of the binominal stock option valuation model and its implied volatilities.
Moreover, the company Coca Cola also uses interest rate swap contracts whose value is determined by the difference of the present value of the future cash inflows and outflows from interest revenues. The Coca Cola Company has many interest bearing borrowings as mentioned in their annual reports. These interest bearing borrowings are preset at both fixed and floating rates. The Coca Cola Company uses interest rate swaps in order to manage the company exposure to the changing interest rates which is also aligned with the Coca Cola Company interest rate strategy (Dodds, 2009).
The company interest rate risk is managed through the swap agreements. The fair value of these swap agreements are used by the Coca Cola Company in order to modify the company’s exposure to the risk posed by interest rate. Any changes in the value of the debt is converted by the Coca Cola Company fixed rate debt into the changing or floating rate on the basis of the EURIBOR over the underlying debt life period.
The agreement includes the receiving of the interest payments valued at fixed rate in exchange of the interest payments made on the basis of the floating rate without the exchange of the main principal amount. From very long past period, the Coca Cola Company has been using interest rate swaps and caps on the floating rate debt for the aim of mitigating the risk and benefiting from the lower floating rates of interest while mitigating the risk form the adverse changes in the interest rates.
The Coca Cola Company has identified in its annual report to its shareholders that the company is exposed to foreign exchange rate exposure. According to its reports, the Coca Cola Company faces risk when its assets or liabilities are denominated in the currency which is not the company’s main functional currency. The Coca Cola Company risk management policy shows that it has a target of hedging between 25% to 80% of the predicted cash flows in each of its major currency (foreign) in the coming twelve months (Coca Cola Bottling Partner, 2009). The Coca Cola Company each subsidiary uses contracts with the main treasury as cash flow or fair value hedges (Coca-cola company, 2009).
Exposure
company most of the production costs are incurred in the currency of Euros (McGuigan, Moyer, & Harris, 2010).
The company Daimler Group transaction exposure for its various divisions including the division of the Mercedes Benz is managed and mitigated through various hedging strategies. This is done by the use of suitable type of financial instruments. This includes primarily the use if the forward contracts and forward options. The company hedges its transaction exposure by periodically assessing the market and financing and opting for the financial derivatives which best suits them. This is done by reviewing the expected transaction risks in accordance with the expected changes and fluctuations in the exchange rate risks. Other than this, the translation of the company Daimler Group assets and its liabilities in Euros is also a major concern, however the company Daimler Group does not uses any hedging technique for this exposure.
The company Daimler Group for the managing of its risk associated with the interest rate sensitive instruments and derivatives that are used in order to manage the requirements of the cash for the company are managed as well. The company Daimler Group is evident to be exposed to the changes and fluctuations in the interest’s rates. The company Daimler Group in order to manage these changes and fluctuations in interest rates or for the management of the risk associated with any losses yielding form the changes in these interest rates uses variety of financial derivatives. These instruments which are usually used by the company Daimler Group include the interest rate swaps and forwards rate contracts and agreements.
The annual report of the company Daimler Group shows that the business operations of the company make it exposed to the fluctuations in the exchange rates of the British pound, Japanese Yen, and US Dollar. These fluctuations are against the currency of Euro which is the functional currency of the company Daimler Group. The company mentions in its report that it is exposed to transaction exposure in the currencies in which the company earns its revenues. Once the company has to convert these earned revenues into the functional currency that is the currency in which the costs are incurred then it may seem inadequate to efficiently cover these costs. The company has mentioned in its reports that the most exposed division is that of the Mercedes Benz. This is because of the reason that the company Mercedes Benz segment major revenues are derived in foreign currencies. Other than this, the company Daimler Group is also exposed to the transaction risks through its equity investments in the Chrysler and EADS, which the company Daimler Group accounts for in equity method.
The company Daimler Group for the aim of providing natural hedging from the transaction exposures tries to increase the amount of cash outflows in the same currency in which the they have excess cash inflows for balancing the effect. The c company Daimler Group uses currency committee for frequently assessing the need of any changes in their risk management strategy (Daimler, 2008).
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