International Monetary Relations
International business expansion although credited with expanding a firm’s revenue base and markets, inevitably exposures the company to intricate currency exchange volatility. The advent of globalization has further led to the same risks being exposed to the domestic firms. The various multinational firms have therefore devised various strategies to circumvent the risks associated with this trend. This involves hedging strategies and controlling the exchange rate risk. For example the strong U.S. dollar in the 1980s was detrimental to United States exports and the recent depreciation of the U.S. dollar although good for the exporters raised the prices of imports. The foreign exchange fluctuations convey an international competitive edge, enhanced revenue, operation costs, market share etc.
A firm’s financial exposure is dependent on the distinctive characteristics of its line of business and its management. Coca Cola Company is the largest soft drinks manufacturing and distribution firm in the world, employing 55,000 staff, and covering markets from Africa to Russia, China, Europe, and the Americas. This exposes the firm to various foreign economic and currency variations that transcends the whole globe. The company is therefore faced with unique challenges in its accounting and financial relations. According to Goldman Sachs (2004), the company continued to benefit from favorable currency transactions in its foreign markets (Forbes, 2004).
There are three main types of foreign exchange exposure faced by the multinational firms. This include: economic exposure or the level a firm’s market value is susceptible to the sudden changes in foreign currency fluctuations; transaction exposure or the company’s short term financial exposure. E.g. exposure from exchange rates denoted in foreign currency in fixed price contracts. Finally, translation exposure or change in the firm’s financial position when the consolidated statements are affected by currency changes when converting to the domestic currency of the parent firm (Stanford 2008).
Coca Cola Company was able to generate profits of 8 cents per share in 2004 from its diverse operations in United Sates, Asia and Brazil due to a large part from foreign exchange transactions. The positive trend from the Latin America countries is expected to continue as U.S. interests rates continue to be reduced during the current global financial crunch. The company has therefore addressed both short-term and long-term exposures to employ financial as well as operational hedges. This ensures that the firm reduces risk exposure while benefiting the company from favorable exchanges rates in its global operations. The currency derivatives contracts are employed e.g. forwards, swaps, options, forward rate agreements etc. All these have underlying foreign currency as the underlying commodity, which coupled with the use of financial hedges effectively, reduce exposure (Bodnar 2000).
Coca Cola Company is therefore able to maintain its high profitability and market penetration as it takes advantage of foreign exchange variation to increase its revenue base and to adjust its costs in foreign markets. The company’s ability to shift costs, production, and sourcing ensure its exposure to currency denominational volatility is kept at minimum. The management also employs currency derivatives to enhance its revenue base within the various foreign exchange markets it is exposed to. The company therefore cushions itself against the increase or decrease of the U.S. dollar, as it operates mostly using the local production sources and has diversified to the bottled water market to widen its scope and market share.