Mondelez 2014 Annual Report Download - page 68

Table of Contents
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 commodity prices, currency exchange rates or interest rates. We manage derivative
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 cocoa, wheat, coffee, soybean and
vegetable oils, and sugar and other sweeteners. 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 energy costs, coffee, sugar and other sweeteners, wheat,
soybean and vegetable oils, cocoa and dairy. 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.
Currency exchange 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 currency 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. We use interest rate swaps to economically convert a portion of
our fixed-rate debt into variable-rate debt. Under the interest rate swap contracts, we agree with other parties to exchange, at
specified intervals, the difference between fixed-rate and floating-rate interest amounts, which is calculated based on an agreed-
upon notional amount. We also use interest rate swaps to hedge the variability of interest payment cash flows on a portion of our
future debt obligations. Substantially all of these derivative instruments are highly effective and qualify for hedge accounting
treatment.
Hedges of net investments in non-U.S. operations – We have numerous investments outside the United States. The net assets of
these subsidiaries are exposed to changes and volatility in currency exchange rates. We use local currency denominated debt to
hedge our non-U.S. net investments against adverse movements in exchange rates. We designated our euro and pound sterling
denominated borrowings as a net investment hedge of a portion of our overall European operations. The gains and losses on our
net investment in these designated European operations are economically offset by losses and gains on our euro and pound
sterling denominated borrowings. The change in the debt’s value, net of deferred taxes, is recorded in the currency translation
adjustment component of accumulated other comprehensive earnings / (losses).
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