• IBM annual report for the fiscal year ended as on 2018 givesdisclosures related to its management of foreign exchange riskunder Item 7. Management's Discussion and Analysis of FinancialCondition and Results of Operations on page no. 66 under the headCurrency rate fluctuations and on page no. 67 Foreign CurrencyExchange Rate Risk.
• Types of hedging instruments the company uses are forwardcontracts, futures contracts, interest rate swaps, cross currencyswaps and options depending on underlying exposure.
  The company issues debt in the global capital markets to fund itsoperations and financing business. To manage these mismatches andto reduce overall interest cost, the company may use interest-rateswaps to convert specific fixed-rate debt issuances intovariable-rate debt and to convert specific variable rate debtissuances into fixed-rate debt.
• The Company hedges net investments in foreign operations. Alarge portion of the company’s foreign currency denominated debtportfolio is designated as a hedge of net investment in foreignsubsidiaries to reduce the volatility in stockholders’ equitycaused by changes in foreign currency exchange rates in thefunctional currency of major foreign subsidiaries with respect tothe U.S. dollar. The company also uses cross-currency swaps andforeign exchange forward contracts for this risk managementpurpose.

Pepsico is in the retail beverage industry. It has operations inover 200 countries and territories and employees 267,000 people(Pepsico, 2019). Just under half of those employees are in theUnited States.

Management of foreign exchange risks

            Pepsicodiscusses how they manage their foreign exchange risk in the RiskManagement Framework section of their 10-K. 43% of their netrevenues from last year came from operations outside of the UnitedStates (Pepsico, 2019). 2018 had an unfavorable foreign exchange,which reduces Pepsico’s net revenue by 1%. The unfavorable exchangecame from the devaluing of Russian rubles, Turkish liras, andBrazilian reals against the US dollar.

           Pepsico manages their risk for fluctuation of exchanges ratesthrough strategies that include global purchasing programs,productivity incentives and hedging. Any cash flows from riskreduction activities are included on their cash flow statement asoperating activities.

Hedging types and instruments

            Pepsico’sstrategies for hedging include using derivatives and debtinstruments (Pepsico, 2019). The most common derivative they useare forward contracts with terms of no more than two years. Thedebt instruments utilized to maintain favorable interest rates arerate swaps, cross currency interest swaps, and treasury locks.

Effectiveness of foreign exchange hedges

            Pepsicohas become more successful over the last several years effectivelyutilizing hedges. This can be seen when analyzing the foreignexchange loss. The better they become at predicting changes, thebetter hedge positions that can get on the market. In the end thiswill lead to smaller losses on foreign transactions and higher netrevenue.

Required:

Discuss the differences noted in how IBM handles foreignexchange risk. Speculate as to why there are differences based onwhat has been researched about IBM and what was posted aboutPepsico .