Pepsi 2014 Annual Report Download - page 60

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Market Risks
We are exposed to market risks arising from adverse changes in:
• commodity prices, affecting the cost of our raw materials and energy;
• foreign exchange rates and currency restrictions; and
• interest rates.
In the normal course of business, we manage commodity price, foreign exchange and interest rate risks
through a variety of strategies, including productivity initiatives, global purchasing programs and hedging.
Ongoing productivity initiatives involve the identification and effective implementation of meaningful cost-
saving opportunities or efficiencies, including the use of derivatives. Our global purchasing programs include
fixed-price purchase orders and pricing agreements. See “Unfavorable economic conditions may have an
adverse impact on our business, financial condition or results of operations.” and “Our business, financial
condition or results of operations may be adversely affected by increased costs, disruption of supply or
shortages of raw materials or other supplies.” in “Risk Factors” in Item 1A. See Note 9 to our consolidated
financial statements for further information on our non-cancelable purchasing commitments.
The fair value of our derivatives fluctuates based on market rates and prices. The sensitivity of our derivatives
to these market fluctuations is discussed below. See Note 10 to our consolidated financial statements for
further discussion of these derivatives and our hedging policies. See “Our Critical Accounting Policies” for
a discussion of the exposure of our pension and retiree medical plan assets and liabilities to risks related to
market fluctuations.
Inflationary, deflationary and recessionary conditions impacting these market risks also impact the demand
for and pricing of our products. See “Risk Factors” in Item 1A. for further discussion.
Commodity Prices
Our open commodity derivative contracts had a notional value of $1.2 billion as of December 27, 2014 and
$1.4 billion as of December 28, 2013. At the end of 2014, the potential change in fair value of commodity
derivative instruments, assuming a 10% decrease in the underlying commodity price, would have increased
our net unrealized losses in 2014 by $103 million.
Foreign Exchange
Our operations outside of the U.S. generate 49% of our net revenue, with Russia, Mexico, Canada, the United
Kingdom and Brazil comprising approximately 23% of our net revenue in 2014. As a result, we are exposed
to foreign exchange risks in certain of the international markets in which we operate. In addition, unstable
economic, political and social conditions and civil unrest in certain markets in which our products are sold,
including in Russia, Ukraine and the Middle East, and currency fluctuations in certain of these international
markets, as well as Venezuela (discussed below), Argentina and Turkey continue to result in challenging
operating environments. During 2014, unfavorable foreign exchange reduced net revenue growth by 3
percentage points, primarily due to depreciation of the Russian ruble, Canadian dollar, Venezuelan bolivar,
Argentine peso and Mexican peso. Currency declines against the U.S. dollar which are not offset could
adversely impact our future results.
The results of our Venezuelan businesses have been reported under highly inflationary accounting since the
beginning of our 2010 fiscal year, at which time the functional currency of our Venezuelan entities was
changed from the bolivar to the U.S. dollar.
In February 2013, the Venezuelan government devalued the bolivar by resetting the exchange rate of
government-operated National Center of Foreign Commerce (CENCOEX) (“fixed exchange rate”), formerly
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