Running Head: Transaction Exposure 1

Paper

On

Transaction Exposure

Of

Coca-Cola Co. & Mercedes Benz

By

Date
Transaction Exposure 2

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
Transaction Exposure 3

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).

Mercedes Benz- Daimler-Chrysler:

Transaction Exposure 4

The Daimler Group is the company which is the producer of the sub section of Mercedes

Benz. The company Daimler Group has many financial risks and opportunities which it faces

while doing foreign trade. Risks and opportunities are evident to have positive as well as

negative effect on the profitability and cash flows of the company. The financial position of the

company Daimler Group is affected by the changes in the cash flows and the profitability of the

company. The company Daimler Group faces many types of financial risks and opportunities.

This includes:

1. Exchange rate Risk

2. Interest Rate Risk

This is represented in the following table:

Financial risks
Risk Effect

Risks relating to pension plans High

Interest rate risks Low
Risks from changes in credit ratings Low
Credit risks Low
Commodity price risks Low
Country risks Low
Exchange rate risks High
(Daimler, 2015)

The company Daimler Group has generally risks associated with its financial position

from the fluctuations in the currency exchange rates, interest rates and changes in the prices of

the commodities. These fluctuations have a risk of negative impact on the financial position and

the cash inflows of the company. The company Daimler Group manages and mitigates this risk

through the use of various strategies. The company Daimler Group manages its risks while in

consideration of the operational business and its various financing activities. The company
Transaction Exposure 5

Daimler Group uses various derivatives and financial instruments for the purpose of hedging

when it is required at the place it is required. The company Daimler Group constantly and

periodically assess ad evaluated these risks and the possible changes in the economic indicators

for making better plans for hedging and mitigating transaction exposure (O'Brien, 2006).

The company Daimler Group business operations and its various financial activities

shows that the company Daimler Group is exposed to the transaction exposure from the changes

in the exchange rate of the Euro, specifically for the US Dollar and other currencies which are

related to the growth markets. This risk arises majorly when the company Daimler Group earns a

profit or revenue in the currency which is other than its main functional currency that is in

foreign currency. This is a type of transaction risk to which it is exposed. This in particular can

be said is evident for its Mercedes Benz division. This division main revenue is majorly

generated from the foreign countries. Moreover the 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.
Transaction Exposure 6

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
Transaction Exposure 7

uses currency committee for frequently assessing the need of any changes in their risk

management strategy (Daimler, 2008).

References:

Coca Cola Bottling Partner. (2009). 2009 Annual Report on Form 20-F. Retrieved 2017, from

Coca Cola Bottling Partner: http://coca-colahellenic.com/en/investors/reports/2009-

annual-report-on-form-20-f/

Coca-cola company. (2009). 2009 Annual Report On Form 10-K. Retrieved 2017, from Coca-

cola company: http://www.coca-colacompany.com/investors/2009-annual-report-on-

form-10-k

Daimler. (2008). Annual Report 2008. Retrieved 2017, from Daimler:

https://www.daimler.com/documents/investors/berichte/geschaeftsberichte/daimler/daiml

er-ir-annualreport-2008.pdf

Daimler. (2015). Financial risks and opportunities. Retrieved 2017, from Daimler:

http://ar2014.daimler.com/management-report/financial-risks-and-opportunities

Dodds, R.-M. (2009). Hedging Foreign Exchange Translation Exposure: The Dilemma.

Retrieved 2017, from GT NEWS: https://www.gtnews.com/articles/hedging-foreign-

exchange-translation-exposure-the-dilemma/

Kim, K. A., & Kim, S. H. (2014). Global Corporate Finance: A Focused Approach. World

Scientific Publishing Co Inc.

McGuigan, J. R., Moyer, R. C., & Harris, F. H. (2010). Managerial Economics: Applications,

Strategy and Tactics. Cengage Learning.

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O'Brien, T. J. (2006). International Financial Economics: Corporate Decisions in Global

Markets. Oxford University Press.