Pepsi 2015 Annual Report Download - page 61

Table of Contents
44
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
with derivative instruments. 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 contracts and 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 and other supplies.” in “Item 1A. Risk
Factors.” 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 “Item 1A. Risk Factors” for further discussion.
Commodity Prices
Our open commodity derivative contracts had a notional value of $1.0 billion as of December 26, 2015 and
$1.2 billion as of December 27, 2014. At the end of 2015, 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 2015 by $85 million.
Foreign Exchange
Our operations outside of the U.S. generated 44% of our net revenue in 2015, with Mexico, Russia, Canada,
the United Kingdom and Brazil comprising approximately 20% of our net revenue in 2015. As a result, we
are exposed to foreign exchange risks in the international markets in which our products are made,
manufactured, distributed or sold. During 2015, unfavorable foreign exchange reduced net revenue growth
by 10 percentage points, primarily due to the Russian ruble, Venezuelan bolivar, Mexican peso, euro, Brazilian
real and the Canadian dollar. Currency declines against the U.S. dollar which are not offset could adversely
impact our future financial results.
In addition, unstable economic, political and social conditions and civil unrest in certain markets in which
our products are made, manufactured, distributed or sold, including in Russia, Ukraine, Brazil, Greece and
the Middle East, and currency fluctuations in certain of these international markets continue to result in
challenging operating environments.
Starting in 2014, Russia announced economic sanctions against the United States and other nations that
include a ban on imports of certain ingredients and finished goods from specific countries. We do not anticipate
the current sanctions to have a material impact on the results of our operations in Russia or our consolidated