MoD 3 SLP Global Financial Management BUS401 - International Business - Essay Example

COCA COLA Case Study The attribution and responsibilities of a financial manager working at the Coca Cola Company circumscribe to the followings: organization, coordination, control and regulation of financial and economic department (including procedures, setting responsibilities and duties for positions under direct authority, workflow); financial interpretation of data collected from the accounting department; budget implementation; elaboration of revenues and expenses schemes along with other company departments such as sales, logistics, administrative; implementation of all data in the budget as they are accomplished; budget analysis, proposing or applying corrective measures; analysis of profit and loss account; review all financial indicators; development of economic and financial forecasts; development of economic analysis and budget corrections; preparing various reports required by the general manager; permanent communication with company departments to achieve the budget (setting documents or information flow, communication, inter-departmental working procedures).

A common definition of exchange rate risk relates to the effect of unexpected exchange rate changes on the value of the firm (Madura, 1989). There are main three types of foreign exchange exposure: Translation exposure-appears because financial statements of foreign subsidiaries (stated in foreign currency) must be restated in the parent’s reporting currency in order to elaborate the consolidated financial statements; Operating exposure (also called economic exposure, competitive exposure, strategic exposure)-displays changes in the present value of the firm; Transaction exposure-it impacts the cash flow of the company.

There are two methods that companies can use to manage foreign exchange (FX) risk: natural hedging and financial hedging. Many companies use both methods (Export Development Canada, 2010). According to an ISDA (International Swaps and Derivatives Associations) study, 92% of the worlds top 500 companies use financial derivatives; 85.1% hedge the interest rate risk, while 78.2% hedge currency risk. As a result of the fact that except the US, Coca Cola earns revenues, pays expenses, owns assets and incurs liabilities in different developed and emerging countries around the globe having various currencies, it has to face the numerous challenges posed by the exchange rate (ER) fluctuations.

In the case of a weak dollar, the company’s worldwide profits stabilize. However, the absence of financial resources and the lack of expertise needed to establish overseas business could affect the decisions of individual investors. In this case, for smaller investors, the stocks of a multinational company such as Coca Cola are the best alternative. For example, in the recent period the company had to manage the Venezuelan Bolivar devaluation implications, that could adversely impact the value of the assets located in this market.

Thus, the giant’s financial managers use derivative financial instruments to limit the exposure to currency exchange rate variations. The Company hedges currency exposures based on a wide range of options and forward contracts. Using its Value-at-Risk models, Coca-Cola was able to calculate its average levels of FX risk exposure (Goldberg and Drogt, 2008). Alongside other successful companies such as IBM, Coca Cola uses derivative financial instruments on large scale. There is a vast literature providing evidence and justification for the extensive application of these techniques (Bradley and Moles, 2002; Hommel, 2003, Carter and Vickery, 1988; Allayanis et al.

2011, Carter et al. 1993, Capsatff and Marshal, 2005). However, derivatives are not a guarantee that ER dynamics and especially the US dollar appreciation against certain currencies would leave unchanged the company’ financial results. References 1. Allayanis, G., Ihring, J., Weston, J. P. (2001). Exchange rate hedging: Financial versus operational strategies, American Economic Review, 91, 391-395. 2. Bradley, K. and Moles, P. (2002). Managing strategic exchange rate exposures: Evidence from UK firms, Managerial Finance, 28, 28-42. 3. Capstaff, J.

and Marshall, A. (2005). International cash management and hedging: A comparison of the UK and French companies, Managerial Finance, 31, 18-34. 4. Carter, J. and Vickery, S.K. (1998). Managing Volatile exchange rates in international purchasing, Journal of Purchasing and Materials Management, 24, 13-20. 5. Carter, J., Vickery, S.K. and D’Itri, M.P. (1993). Currency risk management strategies for contracting with Japanese Suppliers, International Journal of Purchasing and Materials Management, 29, 19-25. 6. Cioltei, D.

(2009, March 27). Cum folosim contractele futures pentru acoperirea riscului valutar. Wall-Street. 7. Export Development Canada. (2010). Managing foreign exchange risk. Retrieved from PBS online http://www.edc.ca/english/docs/fx_managing_foreign_exchange_risk_e.pdf 8. Goldberg, S. R. and Drogt, E.L. (2008). Managing foreign exchange risk, The Journal of Corporate Accounting & Finance, 19, 49-57. 9. Hommel, U. (2003). Financial versus operative hedging of currency risk, Global Finance Journal, 14, 1-18. 10. Madura, J. (1989). International Financial Management, 2nd Edition, St.

Paul, Minnesota: West Publishing Company.