University of Technology, Jamaica

College of Business and Management

School of Business and Administration

International Financial Management (FIN 4005)

Group Project PEPSI

Tutor: Mrs. Heather Brown Scott

Submission Date: November 28, 2019

Submitted By:

Monique Barnett 1201165

Lashand Bennett 1502716

Jova-Deen Muir 1500882

Shanice Osbourne 1605670

 TABLE OF CONTENTS

CONTENTS PAGES

INTRODUCTION ……………………………………………………… 3

SECTION 1 …………………………………………………………… 4

Chapter 1 …………………………………………………………..

Chapter 2 …………………………………………………………...

Chapter 3 …………………………………………………………...

Chapter 4 ……………………………………………………………

SECTION 2 …………………………………………………………..

Chapter 7 and 8 …………………………………………………………

Chapter 5,10,11,12 ……………………………………………………..

SECTION 3 ………………………………………………………….

Chapter 13 …………………………………………………………..

CONTRIBUTION …………………………………………………….

REFERENCE S ……………………………………………………….
 INTRODUCTION

PepsiCo has engaged in broad scale production for many products. The company was founded

on August 28, 1898 by Mr. Caleb Bradham. The company controls various subsidiaries such as

Frito-Lay and Gatorade and has done their very best ever since then to complete their goals

effectively and efficiently. They have delivered great results and have yielded profits in their

operations. Being a leader in the global food and beverage industry, the company has adequately

marketed their products and services all over the world. By doing this, they can expand their

customer base; and to satisfy the needs of various people across the world.
Chapter 3

a. How has the MNC used in the international Financial markets? Your discussion should

include the international capital, bonds, credit and Money markets. The specific details of

the interactions are included in the financial statements and the notes of the notes of the

financial statements.

PepsiCo has continued to deliver strong performance in the international financial

markets, by competing in attractive and growing categories with leading brands and a

broad product portfolio. PepsiCo has created a global footprint for themselves, in their

largest market that have always withheld a strong position. In 2018 PepsiCo emerged

with a new vision within the aim to compete more effectively to win in more of their

markets. In 2018 they obtained an organic revenue of 3.7 percent; the company have met

and exceed each of their financial targets. Their core constant currency EPS grew to 9%

and they have generated $7.6 billion of free cash flow excluding certain items. Most of

PepsiCo Revenue is generated from food which is 54%, the rest of the market comes

from beverages which is 46%. PepsiCo have six reportable segments which are

generating operating profit. These division include North American Beverages (20%),

Latin America (9%), Asia, Middle East and North Africa (10%), Quaker Foods North

America (6%), Europe Sub-Saharan Africa (12%) and Frito-Lay North America (45%).

In October 2017 PepsiCo issued a bond, the issue volume is 1,000,000,000 in US

currency, the issue price is 99.98, with a coupon of 2%. The bond is expected to mature

on April 4, 2021. Moody ratings, rate PepsiCo Inc as A1, which is medium grade.
 Moreover, PepsiCo have operations outside of the United states, these operations

generate a revenue of 43% in the year 2018. The outside operations include Mexico,

Russia, Canada, the United Kingdom and Brazil. PepsiCo is exposed to foreign exchange

risk in the international markets, because of the fluctuation of these currencies in the

international market. (financial report)

b. Examine and explain the fluctuation in the MNC’s stock price over the last year. You may

answer the question by looking at the monthly stock prices. Does it appear that the MNC issues

stock in foreign countries? If yes, are there any correlations in the stock price movements?

PepsiCo Stock Price over the last year

Date Open High Low Close

June 28,2018 108.42 109.3 108.3 108.68
July 30, 2018 113.78 114.59 113.67 114.18
August 28, 2018 112.22 112.22 110.89 111.17
September 28, 2018 111.54 112.05 110.91 111.8
October 30, 2018 113.75 114.23 112.6 113.77
November 30, 2018 118.13 122 118.13 121.94
December 30, 2018 110.58 111.09 109.32 110.48
January 31, 2019 110.97 112.9 110.21 112.67
February 28, 2019 114.74 116.22 114.21 115.64
March 28, 2019 121.89 122.47 121.59 121.84
April 30, 2019 127.05 128.39 126.34 128.05
May 30, 2019 128.15 128.91 127.78 128.61
June 28, 2019 132.28 132.41 130.76 131.13
The diagram shows a fluctuation in Stock prices from June 2018 to June 2019 For PepsiCo Inc.

This table shows the open stock price amount and closing stock price amount, it also indicates

whether the stock prices are high or low. PepsiCo does not issue stock in foreign countries,

reason why they have a competitive edge in terms of worldwide distributions. PepsiCo can

produce all its products in the country where they are consumed. Hence there is no relationship

in the stock price movements.

Chapter 4

Part A: What are the three main currencies excluding its home currency, the MNC uses to

conduct its international business? Prepare a chart or table showing the direct and indirect

quotation of each foreign currency in relation to the home currency of the MNC at the last year-

end and the previous one. Also prepare a cross-exchange rate chart for these currencies for the

same dates.

PepsiCo’s operates in many foreign markets, some are Colombia, China, France and United

Kingdom. However, the three main foreign currencies used by PepsiCo are Russian Ruble,

Mexican pesos and Canadian dollars.

The charts below show the direct and indirect quotation for the years 2017 and 2018 about the

Mexican pesos, Canadian Dollars and Russian Ruble.

  For the year ended Dec. 31. 2017

Foreign Currency Direct Quotation Indirect Quotation
MXN MXN/USD, 1 MXN = USD USD/MXN, 1 USD = MXN
0.0520 19.1957

CAD CAD/USD, 1 CAD = USD USD/CAD, 1 USD = CAD

0.7832 1.2766

RUB RUB/USD, 1 RUB = 0.1706 USD/RUB, 1 USD = 58.6090

For the year ended Dec. 31. 2018

Foreign Currency Direct Quotation Indirect Quotation

MXN MXN/USD, 1 MXN = USD USD/MXN, 1 USD = MXN

0.0497 20.1181

CAD CAD/USD, 1 CAD = USD USD/CAD, 1 USD = CAD

0.7438 1.3444
 RUB RUB/USD, 1 RUB = 0.1479 USD/RUB, 1 USD = 67.5768

The charts below show the cross-exchange rate chart for the currencies above during the same
period.

Cross Exchange Rate for the year ending Dec. 31. 2017
Foreign Exchange Mexican Pesos (MXN) Canadian Dollars Russian Ruble (RUB)
Rates (CAD)

MXN - 0.0665 3.0532

CAD 15.0360 - 45.9083

RUB 0.3275 0.0217 -

Cross Exchange Rate for the year ending Dec. 31. 2018
Foreign Exchange Mexican Pesos (MXN) Canadian Dollars Russian Ruble (RUB)
Rates (CAD)

MXN - 0.0668 3.3589

CAD 14.9644 - 50.2654

RUB 0.2977 0.0198 -

Part B: Illustrate, using diagrams or tables and calculations, how the values of two of these

currencies have changed (appreciated or depreciated) over the past year relative to the MNC’s

home currency, and comment on the main reasons for these changes.
To answer this question, review a foreign exchange table provided online for the company’s

year-end and another table containing quotations from the previous year-end date.

Currencies Year 2017 Year 2018 Calculation Percentage Effects of

change in value the USD
relatively to the
USD

MXN 0.0520 0.0497 (0.0497- -0.04% Depreciate

0.0520)/0.0520

CAD 0.7832 0.7438 (0.7438- -0.05% Depreciate

0.7832)/0.7832

RUB 0.1706 0.1479 (0.1479- -0.13% Depreciate

0.1706)/0.1706

From the above calculation it can be seen that all three currencies depreciated against the US

dollar. This means that these currencies can now be exchanged for less U.S dollars because their

currency has weakened to PepsiCo’s home currency. There are some factors that contribute to a

country’s currency depreciation or appreciation and such are economic growth, relative price

levels, inflation rate differences and monetary policy.

Chapters 5,10,11 & 12

Part A

A Multinational company is a business that operates in many different countries apart

from its home country. MNC is said to be any company that has business activities in more than

on country. All MNC are involved in international trade that allows that to be faced with

transaction exposure risk, bases on the risk of currency conversion and Pepsi is a part of this

world.

According to the annual financial reports from Pepsi it indicates that the company is

indeed face with exposure to market risk which included foreign exchange risks and currency

restrictions. These risks are managed through a variety of strategies such as derivatives, which

are designated as either fair value or cash flow hedges and qualify for hedge accounting

treatment which are classified as operating activities. Pepsi operation outside the Us generates

49% of our net revenue, with Russia, Mexico, Canada, the United Kingdom and Brazil

comprising approximately 25% of our net revenue. Because of foreign currency purchases and

foreign currency assets and liabilities from the normal course of business and due to this they are

exposed to foreign currency risk.

This is managed through sourcing purchases from local suppliers, negotiating contracts in

local currencies with foreign suppliers and using derivatives, primarily forward contracts with

terms of no more than two years. In Pepsi Income statement the gains or losses are recognized

as transaction gains related to foreign currency transactions. Foreign currency derivatives had a

total face value of $2.8 billion as of December 29, 2018.

Over the period of the next twelve months, the company is expected to reclassify net losses of

$14 million based on the relation of foreign currency contracts that qualify for hedge accounting

from accumulated other comprehensive loss into net income. Additionally, ineffectiveness for

our foreign currency hedges was not material for all periods presented. For foreign currency

derivatives that do not qualify for hedge accounting treatment, all losses and gains were offset by

changes in the underlying hedged items, resulting in no net material impact on earnings.

In addition, economic exposure also known as operating exposure refers to an effect

caused on a company’s cash flows due to unexpected currency rate fluctuations. Economic

exposures are long-term in nature and have a substantial impact on a company’s market value.

(Board, S 2019 Pepsi indicated that the economic impact of currency exchange rates is complex

because such changes are often linked to variability in real growth, interest rate inflation,

governmental actions, and other factors. Changes such as these if material, can cause us to adjust

our financing and operating strategies. Pepsi further added that they minimize for foreign

exchange by restricting its operations to reduce its net exchange rate cash flow. For the inflow of

cash Pepsi reduce foreign sales, increase foreign supply order and restructure debts to increase

debts payment in foreign currency. But on the outlaw side the company had to increase foreign

sales, reduce foreign supply orders and Restructure debts to reduce debts payment in foreign

currency. (Gaspar, 2016)

Translation exposure is a type of foreign exchange risk faced by companies that engage

in international trade, exists in any worldwide market. It is the risk that exchange

rate fluctuations will change the value of a contract before it is settled. (Wilkinson, J 2016)

 This is another type of risk that Pepsi must encounter as it is the impact of settling outstay

obligations entered before changes in the exchange rates but to be settled after change in

exchange rates. For an MNC such as Pepsi that translates each subsidiary’s financial date from

its host country currency to home country currency for consolidated financial reporting doesn't

directly affect cash flows, but the firm is more concerned about the potential impact on reported

consolidated earnings and stock prices. (Gaspar, 2016)

Part B

Pepsico operates in the multiple international markets which generates 42% of the

company’s net revenue, and because of this they are exposed to foreign exchange risks.

Brazil, China, India, Mexico, Russia are only a few of the countries in which Pepsi operates,

each county has their own volatile economic, political and social environment that affects the

exchange rate movement. A hedge is an investment that protects your finances from a risky

situation. Hedging is done to minimize or offset the chance that your assets will lose value. It

also limits your loss to a known amount if the asset does lose value. It's like home insurance.

(Amadeo, K 2019).

Cash flow hedging has been utilized by PepsiCo to minimize the foreign currency risk as

well as the price risk attached to buying inventory in the future. As a result of current market

conditions, the company stated that they expect to reclassify their net gain of $5 million in

their cash flow hedges. This will be in the form of reclassification accumulated other

comprehensive loss into net income during the next 1 year. Pepsi also use derivatives to

hedge against the fluctuations in profits and losses and cash flows from foreign exchange

risk. The multinational company centrally manages their commodity derivatives on behalf of

each one of their divisions. The net investment hedges made by Pepsico were estimated that
 an unfavorable 10% change in the underlying exchange rates would have increased Pepsico’s

net unrealized profit in 2018 by $125 million. . Pepsico’s cash flow hedge had a 10%

decrease with a $10 million difference as at December 30, 2018.

PART C

Pepsi Corporation is a multinational company and takes in around 45% of the revenue the

company receives, they are exposed to foreign exchange risks. Few of the countries that they

operate in are India, China, Brazil Mexico and Russia, each of those countries have their own

macro environmental risk that affects the exchange rate movement.

Derivative instruments are financial contracts whose value depends on another financial asset.

Options and futures contracts are the most common derivatives. Such contracts can be used to

hedge financial exposure. Hedging refers to the practice of reducing or fully eliminating the risk

associated with holding a volatile asset. If used properly, hedging transactions can take a lot of

worry and stress out of investing. (Ozyasar, H). At the year of 2017financial year Pepsi were

$0.8 billion and by the end of 2018 it had almost doubled with a figure of $1.5 billion, in 2019

investment rose to $4.56 billion in which showed an increased from 2017 of $1.6 billion.

There was an estimation of an unfavourable 7% percent change in the rate of exchange would

have caused an increase in the net unrealized profit in 2017 by $125 million and 2018 by $133

million. The cash flow hedge decreased by 5 percent with a difference of $5million by the end of

2017.

Part D

The consolidated earnings means, for any period, “income (loss) before the deduction of income

and franchise taxes” of the Borrower and the Restricted Subsidiaries, excluding (a) extraordinary

items for such period, determined in a manner consistent with the manner in which such amount
was determined in accordance with the audited financial statements. For Pesico it is a combine

financial statement of all the companies subsidiaries which will convey to investor how the

overall company is doing. According to their consolidated net revenue from 2018 to 2019 has

only increased by 1%, Their net operating profit has increased by 7% in 2018 however there is

still a net loss income by 23%. Pepsico unfavorable loss in 2018 has reduced its net consolidated

earnings is due to the heading net investment in the previous year and the $2.5 billion provisional

net tax expense from the TCJ Act in 2018. The net revenue for 2018 has highlighted that only the

North American subsidiaries has suffered a reduction in revenue these are the Frito-Lay North

America (FLNA), Quaker Foods North America (QFNA) and North America Beverages (NAB)

at 1% 5% and 6% reduction respectively

Chapter 7

Part A: Using actual and not fictitious interest rates and foreign exchange rates for the main

currencies where the MNC conducts international business, illustrate and determine if any type

of arbitrage is possible (locational, triangular and covered interest).

According to Madura (2010), International Arbitrage is defined as capitalizing on a discrepancy

in quoted prices by making a riskless profit. There are three types of international arbitrage:

Locational, Triangular and Cover Interest. As mention in chapter four (4), there are three main

currencies, other than the home country currency which is the USD the is used by PepsiCo to

conduct international business. There Mexican Pesos, Russian Ruble and the Canadian Dollars.

Locational Arbitrage

Madura (2011), also stated that Locational Arbitrage is the process of buying a currency at the

location where it is priced cheap and immediately selling it at another location where it is priced

higher. Gains from locational arbitrage are based on the amount of money used and the size of

the discrepancy.

The table below will show the two banks that PepsiCo uses to exchange Canadian Dollar in the

United States of America.

Bid Price Ask Price

Citibank 1.3514CAD 1.3049CAD
HSBC 1.2887CAD 1.3399CAD

Upon using these two banks in the US, you would see that location arbitrage is possible, because

the bid price in the Citibank is higher than the ask price for HSBC.

Triangular Arbitrage
 Madura (2011), went on to defined Triangular Arbitrage as a currency transaction in the spot

market to capitalize on discrepancies in the cross-exchange rates between two currencies.

Transaction costs can reduce or even eliminate the gains from triangular arbitrage.
USD
Using the year 2018 to calculate:

Mexican Peso (MXN) = $0.0497

CA MXN Canadian Dollar (CAD) = $0.7438

D
Mexican Peso to Canadian Dollar = $0.0668

Assume that PepsiCo invest $15,000,000USD.

1. Test for triangular arbitrage by calculating cross rate and compare to quoted rates.

2. Convert USD to MXN: $15,000,000 ÷ $0.0497 = $301,810,865MXN

3. After that, convert MXN to CAD using $0.0668: $301,810,865 × $0.0668 =

$20,160,966CAD

4. Then convert back to USD using CAD: $20,160,966 × $0.7438 = $14,995,726USD

5. Lastly calculate the profit: $14,995,726 - $15,000,000 = -$4,274USD

After determining the profit, PepsiCo realize that they have would not make a profit so therefore,

the triangular arbitrage would be impossible to use.

Covered Interest Arbitrage

According to Madura (2011), Covered Interest Arbitrage is defined as the process of capitalizing

on the interest rate differential between two countries while covering your exchange rate risk

with a forward contract. Consists of two parts:

a. Interest arbitrage: the process of capitalizing on the difference between interest

rates between two countries.

 b. Covered: hedging the position against interest rate risk.

Using the year December 31, 2018, assume that PepsiCo used $15,000,000 in investment with:

Spot rate USD = $19.4849MXN

30-days Forward Rate = $20.4791

US Interest Rate = 1.50%

Mexico Interest Rate = 7.82%

1. Convert $15,000,000USD to MXN: $15,000,000 ÷ $19.4849 = $769,827MXN (Demand

Spot Rate)

2. Invest MXN @ 7.82%: $769,827 × (1+0.0782) = $830,027MXN

3. Convert MXN to USD: $830,027 × $20.4791 = $16,998,213USD ( Supply @ Forward

Rate )

4. Calculate the profit: $16,998,213 - $15,000,000 = $1,998,213USD

5. Determine if the covered arbitrage is feasible: ($1,998,213 ÷ $15,000,000) × 100 =

13.32%

Based on the example stated above, using the covered interest arbitrage is possible. Reason why,

PepsiCo would earn a profit of 13.32% which is higher than the current 1.50% profit that they

would earn if they invest in their home country.

Chapter 13
 A. Foreign direct investments also known as FDI is when a company owns another company

in a different country. With FDI the companies are directly involved in the day to day

running operations in the other country. (economy) Emerging markets on the other hand

are economies that are in the progress of becoming a developed country. FDI is used to

improve MNC profitability and enhance shareholders wealth. In terms of Revenue

motives FDI aid an MNC to attract new sources of demand while with cost one can get

fully benefit from economies of scale. PepsiCo is one of the world’s second largest food

and beverage company, they are aggressively expanding in emerging markets some of

which includes China, Russia, brazil and India.

Emerging Markets have boots PepsiCo revenue, between the year 2006 to 2011 they have

experienced a significant growth from 8 billion to 22 billion. (Zhang, 2013)

PepsiCo is taking a stake into China natural food producer. The company is buying 26% of

Natural Food International for $131 million, becoming the company’s Largest shareholders. (He,

2019)

PepsiCo has also invested in India, the area in which they invest include the product

innovation, increasing manufacturing capacity, strengthening the supply chain of agriculture

programme. They have built beverage and snack food business in India which is supported by62

plants across the country.

PepsiCo has been consistently investing in India, in the areas of product innovation, increasing

manufacturing capacity, ramping up market infrastructure, strengthening supply chain and

expanding company’s agriculture programme. The company has built an expansive beverage and

snack food business supported by 62 plants across the country. In two decades, the company has
been able to organically grow eight brands, each of which generate Rs. 1000 crores or more in

estimated annual retail sales and are household names, trusted across the country. Pepsico india

Each country as favorable characteristics for direct foreign investment to a multinational

company like PepsiCo. Labour cost in emerging markets tend to be less than developed countries

reason why it as a favorable characteristic. With emerging markets there is always new source

for demand.

B. Do you think that the economic growth levels of the countries where the MNC does

business are highly correlated? Do you think the performance levels of the MNC in each

country are highly correlated?

The economic levels of the countries where PepsiCo does business are highly correlated,

this can be indicated by the profits earned in each segment or division of the market. As

was PepsiCo as six different segments in which they generate revenue from, as was

mentioned earlier. These division include North American Beverages (20%), Latin

America (9%), Asia, Middle East and North Africa (10%), Quaker Foods North America

(6%), Europe Sub-Saharan Africa (12%) and Frito-Lay North America (45%). However,

economic growth is directly related to an increase in a company’s GNP. The performance

levels of the MNC in each country is not highly correlated, each country is different in

terms of their population size, to the products that are in demand, hence the reason why

they are highly not correlated. In addition, there might be a slight correlation seeing that

the MNC will be facing practically the same environmental threats in each country.
Contribution Table

Group Member Task Assign

Monique Barnett (1201165) Chapter 1

Chapter 2
Jova-Deen Muir (1201165) Chapter 3

Chapter 13
Lashand Bennett (1502716) Chapter 5
Shanice Osbourne (1605670) Chapter 4

Chapter 7
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