Reference no: EM133076360

Here is an excerpt from the 2005 Annual Report of the Coca-Cola Company: "Foreign Currency.  

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. Approximately 78 percent of 2004 operating income was generated outside the United States; therefore, weakness in one particular currency is often offset by strengths in others over time. We use derivative financial instruments to further reduce our net exposure to currency fluctuations.

Our Company enters into forward exchange contracts and purchases currency options (principally euro 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 relating to exchange rate fluctuations on certain monetary assets and liabilities. We also enter into forward exchange contracts as hedges of net investments in international operations."

1. Your friend has not studied international finance, which she now regrets! However, she is a committed shareholder of Coca-Cola Company, and is very much concerned about the possible adverse impacts of recent volatilities in US dollar exchange rates against different currencies on her financial well-being. Based on the above excerpt, give a short letter to her to show that the company is following an active exchange rate risk management policy to minimize these risks that she is worried about. In your note, make sure you explain to your friend the meanings of the terms highlighted in the excerpt.
2. Draw examples from the real world to show how corporations have in fact employed different hedging actions to deal with exchange rate uncertainty they were facing. In each case, make sure you explain the type of exchange risk involved.