How would Coca Cola use the Futures Market to manage its biggest risks? How do Futures...

How would Coca Cola use the Futures Market to manage its biggest risks? How do Futures Exchanges manage the risk of the participants?

2-3 paragraphs please

Expert Solution

Some of the risks faced by Coca Cola are :

Risk of raw material prices (such as sugar) increasing in the future.
Foreign exchange risk

If sugar prices increase in the future, Coca Cola would pay higher input costs and its profits would decline. To hedge against this risk Coca Cola could buy sugar in the Futures market, and lock in the purchase price of sugar today. This would hedge the risk of higher input costs in the future.

Coca Cola operates in foreign markets and receives earnings/cash flows from those foregin markets. If the US dollar appreciates relative to the foreign currency, the value of dollars received will be lower. This is foreign exchange risk. Coca Cola can hedge against this risk by selling the foreign curreny in the futures market. It can thus lock in the exchange rate at which the foreign curreny is sold, and protect the dollar value of its cash inflows.

Futures Exchanges manage the risk of the participants by requiring that participants deposit adequate margin. Participant's margin accounts are "marked-to-market" daily, and any participant having inadequate margin is required to deposit additional margin. With this process, the counterparty risk/settlement risk is managed by Futures Exchanges

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