Mondelez 2013 Annual Report Download - page 80

Table of Contents
We use a combination of primarily foreign currency forward contracts, futures, options and swaps; commodity forward contracts,
futures and options; and interest rate swaps to manage our exposure to cash flow variability, protect the value of our existing
foreign currency assets and liabilities and protect the value of our debt. See Note 9, Financial Instruments , to the consolidated
financial statements for more information on the types of derivative instruments we use.
We record derivative financial instruments at fair value in our consolidated balance sheets within other current assets or other
current liabilities due to their relatively short-term duration. Cash flows from derivative instruments are classified in the consolidated
statements of cash flows based on the nature of the derivative instrument. Changes in the fair value of a derivative that is
designated as a cash flow hedge, to the extent that the hedge is effective, are recorded in accumulated other comprehensive
earnings / (losses) and reclassified to earnings when the hedged item affects earnings. Changes in fair value of economic hedges
and the ineffective portion of all hedges are recognized in current period earnings. Changes in the fair value of a derivative that is
designated as a fair value hedge, along with the changes in the fair value of the related hedged asset or liability, are recorded in
earnings in the same period. We use foreign currency denominated debt to hedge a portion of our net investment in foreign
operations against adverse movements in exchange rates, with changes in the value of the debt recorded within currency
translation adjustment in accumulated other comprehensive earnings / (losses).
In order to qualify for hedge accounting, a specified level of hedging effectiveness between the derivative instrument and the item
being hedged must exist at inception and throughout the hedged period. We must also formally document the nature of and
relationship between the derivative and the hedged item, as well as our risk management objectives, strategies for undertaking the
hedge transaction and method of assessing hedge effectiveness. Additionally, for a hedge of a forecasted transaction, the
significant characteristics and expected term of the forecasted transaction must be specifically identified, and it must be probable
that the forecasted transaction will occur. If it is no longer probable that the hedged forecasted transaction will occur, we would
recognize the gain or loss related to the derivative in earnings.
When we use derivatives, we are exposed to credit and market risks. Credit risk exists when a counterparty to a derivative contract
might fail to fulfill its performance obligations under the contract. We minimize our credit risk by entering into transactions with
counterparties with high quality, investment grade credit ratings, limiting the amount of exposure with each counterparty and
monitoring the financial condition of our counterparties. We also maintain a policy of requiring that all significant, non-exchange
traded derivative contracts with a duration of one year or longer are governed by an International Swaps and Derivatives
Association master agreement. Market risk exists when the value of a derivative or other financial instrument might be adversely
affected by changes in market conditions and foreign currency exchange rates, commodity prices, or interest rates. We manage
market risk by limiting the types of derivative instruments and derivative strategies we use and the degree of market risk that we
plan to hedge through the use of derivative instruments.
Commodity cash flow hedges – We are exposed to price risk related to forecasted purchases of certain commodities that we
primarily use as raw materials. We enter into commodity forward contracts primarily for wheat, soybean and vegetable oils, sugar
and other sweeteners and cocoa. Commodity forward contracts generally are not subject to the accounting requirements for
derivative instruments and hedging activities under the normal purchases exception. We also use commodity futures and options to
hedge the price of certain input costs, including wheat, soybean and vegetable oils, sugar and other sweeteners and cocoa. Some
of these derivative instruments are highly effective and qualify for hedge accounting treatment. We also sell commodity futures to
unprice future purchase commitments, and we occasionally use related futures to cross-hedge a commodity exposure. We are not
a party to leveraged derivatives and, by policy, do not use financial instruments for speculative purposes.
Foreign currency cash flow hedges – We use various financial instruments to mitigate our exposure to changes in exchange rates
from third-party and intercompany actual and forecasted transactions. These instruments may include foreign exchange forward
contracts, futures, options and swaps. Based on the size and location of our businesses, we use these instruments to hedge our
exposure to certain currencies, including the euro, pound sterling and Canadian dollar.
Interest rate cash flow and fair value hedges –
We manage interest rate volatility by modifying the pricing or maturity characteristics
of certain liabilities so that the net impact on expense is not, on a material basis, adversely affected by movements in interest rates.
As a result of interest rate fluctuations, hedged fixed-
rate liabilities appreciate or depreciate in market value. We expect the effect of
this unrealized appreciation or depreciation to be substantially offset by our gains or losses on the derivative instruments that are
linked to these hedged liabilities. We use derivative instruments, including interest rate swaps that have indices related to the
pricing of specific liabilities as part of our interest rate risk management strategy. As a matter of policy, we do not use highly
leveraged derivative instruments for interest rate risk management.
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