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Financial Instruments | 12 Months Ended
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Dec. 31, 2018
Text block [abstract] |
Financial Instruments | Note 20. Financial Instruments Fair Value of Financial Instruments The Company uses a three-level fair value hierarchy to prioritize the inputs used to measure the fair value of its financial instruments. The three input levels are described as follows:
• |  | Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
• |  | Level 2: inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly.
• |  | Level 3: are unobservable inputs for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
The Company measures the fair value of its financial assets and liabilities classified as level 1 and 2, applying the income approach method, which estimates the fair value based on expected cash flows discounted to net present value. The following table summarizes the Company’s financial assets and liabilities measured at fair value, as of December 31, 2018 and 2017:
|  | 2018 |  |  | 2017 |
|  | Level 1 |  |  | Level 2 |  |  | Level 1 |  |  | Level 2 |
Derivative financial instruments asset |  | Ps. | — |  |  | Ps. | 2,605 |  |  | Ps. | 22 |  |  | Ps. | 1,183 |
Derivative financial instruments liability |  |  | 236 |  |  |  | 881 |  |  |  | 26 |  |  |  | 4,468 |
Trust assets of labor obligations |  |  | 1,142 |  |  |  | — |  |  |  | 1,801 |  |  |  | — |
20.1 Total debt The fair value of bank loans is calculated based on the discounted value of contractual cash flows whereby the discount rate is estimated using rates currently offered for debt of similar amounts and maturities, which is considered to be level 2 in the fair value hierarchy. The fair value of the Company’s publicly traded debt is based on quoted market prices as of December 31, 2018 and 2017, which is considered to be level 1 in the fair value hierarchy (See Note 18). 20.2 Forward agreements to purchase foreign currency The Company has entered into forward agreements to reduce its exposure to the risk of exchange rate fluctuations among the Mexican peso and other currencies. These instruments have been designated as cash flow hedges and are recognized in the consolidated statement of financial position at their estimated fair value which is determined based on prevailing market exchange rates to terminate the contracts at the end of the period. Changes in the fair value of these forwards are recorded as part of “cumulative other comprehensive income”. Net gain/loss on expired contracts is recognized as part of foreign exchange or cost of goods sold, depending on the nature of the hedge in the consolidated income statements. Net changes in the fair value of forward agreements that do not meet hedging criteria for hedge accounting are recorded in the consolidated income statements under the caption “market value gain on financial instruments”. At December 31, 2018, the Company has the following outstanding forward agreements to purchase foreign currency:
|  |  |  |  | Fair Value |
|  | Notional |  |  | (Liability) |  |  | Asset |
Maturity Date |  | Amount |  |  | Dec. 31, 2018 |
2019 |  | Ps. | 4,768 |  |  | Ps. | (66) |  |  | Ps. | 109 |
At December 31, 2017, the Company had the following outstanding forward agreements to purchase foreign currency:
|  |  |  |  | Fair Value |
|  | Notional |  |  | (Liability) |  |  | Asset |
Maturity Date |  | Amount |  |  | Dec. 31, 2017 |
2018 |  | Ps. | 6,882 |  |  | Ps. | (22) |  |  | Ps. | 190 |
20.3 Options to purchase foreign currency The Company has executed call option and collar strategies to reduce its exposure to the risk of exchange rate fluctuations. A call option is an instrument that limits the loss in case of foreign currency depreciation. A collar is a strategy that combines call and put options, limiting the exposure to the risk of exchange rate fluctuations in a similar way as a forward agreement. These instruments have been designated as cash flow hedges and are recognized in the consolidated statement of financial position at their estimated fair value which is determined based on prevailing market exchange rates to terminate the contracts at the end of the period. Changes in the fair value of these options, corresponding to the intrinsic value, are initially recorded as part of “cumulative other comprehensive income”. Changes in the fair value, corresponding to the extrinsic value, are recorded in the consolidated income statements under the caption “market value gain on financial instruments,” as part of the consolidated net income. Net gain/(loss) on expired contracts including the net premium paid, is recognized as part of cost of goods sold when the hedged item is recorded in the consolidated income statements. At December 31, 2018, the Company paid a net premium of Ps. 43 million for the following outstanding collar options to purchase foreign currency:
|  |  |  |  | Fair Value |
|  | Notional |  |  | (Liability) |  |  | Asset |
Maturity Date |  | Amount |  |  | Dec. 31, 2018 |
2019 |  | Ps. | 1,734 |  |  | Ps. | (33) |  |  | Ps. | 57 |
As of December 31, 2017, the Company paid a net premium of Ps. 7 million for the following outstanding collar options to purchase foreign currency:
|  |  |  |  | Fair Value |
|  | Notional |  |  | (Liability) |  |  | Asset |
Maturity Date |  | Amount |  |  | Dec. 31, 2017 |
2018 |  | Ps. | 266 |  |  | Ps. | (5) |  |  | Ps. | 17 |
20.4 Cross-currency swaps The Company has contracts denominated as interest and cross-currency swaps in order to reduce the risk emanated from interest rate and exchange rate fluctuation in the contracted credits denominated in USD, hedging the total contracted loans as of December 2018. Exchange rate swaps are designated as hedge instruments where the Company changes de debt profile to the functional currency to reduce the exchange rate fluctuation risk. The fair value is estimated using market prices that would apply to terminate the contracts at the end of the period. For accounting purposes, the cross currency swaps are recorded as both, Cash Flow Hedges in regards to the foreign exchange risk, and Fair Value Hedges in regards to the interest rate risk and foreign exchange risk. The fair value changes related to exchange rate fluctuations of the notional of those cross currency swaps and the accrued interest are recorded in the consolidated income statements. The remaining portion of the fair value changes, when designated as Cash Flow Hedges, are recorded in the consolidated balance sheet in “cumulative other comprehensive income”. If they are designated as Fair Value Hedges the changes in this remaining portion are recorded in the income statements as “market value (gain) loss on financial instruments”. At December 31, 2018, the Company had the following outstanding cross currency swap agreements:
|  |  |  |  | Fair value |
|  | Notional |  |  | (Liability) |  |  | Asset |
Maturity date |  | ammount |  |  | As of December 31, 2018 |
2019 |  | Ps. | 4,652 |  |  | Ps. | — |  |  | Ps. | 498 |
2020 |  |  | 14,400 |  |  |  | (79 | ) |  |  | 969 |
2021 |  |  | 4,035 |  |  |  | — |  |  |  | 586 |
2023 |  |  | 11,219 |  |  |  | (390 | ) |  |  | 135 |
2027 |  |  | 6,889 |  |  |  | (42 | ) |  |  | 202 |
At December 31, 2017, the Company had the following outstanding cross currency swap agreements:
|  |  |  |  | Fair Value |
|  | Notional |  |  | (Liability) |  |  | Asset |
Maturity Date |  | Amount |  |  | Dec. 31, 2017 |
2018 |  | Ps. | 24,354 |  |  | Ps. | (3,863 | ) |  | Ps. | — |
2019 |  |  | 6,263 |  |  |  | (205 | ) |  |  | — |
2020 |  |  | 14,439 |  |  |  | (163 | ) |  |  | 605 |
2021 |  |  | 4,046 |  |  |  | — |  |  |  | 24 |
2023 |  |  | 1,776 |  |  |  | — |  |  |  | 139 |
2027 |  |  | 6,907 |  |  |  | (129 | ) |  |  | 179 |
20.5 Interest Rate swaps The Company has contracted a number of interest rate swaps to reduce its exposure to interest rate fluctuations associated with its debt denominated in BRL. These interest rate swaps, for accounting purposes are recorded as Fair Value Hedges and the interest rate variation is recorded in the consolidated income statement as “market value (gain) loss on financial instruments”. At December 31, 2018, the Company had the following outstanding interest rate swap agreements:
|  |  |  |  | Fair value |
|  | Notional |  |  | (Liability) |  |  | Asset |
Maturity date |  | ammount |  |  | As of December 31, 2018 |
2019 |  | Ps. | 4,013 |  |  | Ps. | (49 | ) |  |  | — |
2020 |  |  | 4,559 |  |  |  | (112 | ) |  |  | — |
2021 |  |  | 4,035 |  |  |  | (110 | ) |  |  | — |
At December 31, 2017, the Company had the following outstanding interest rate swap agreements:
|  |  |  |  | Fair Value |
|  | Notional |  |  | (Liability) |  |  | Asset |
Maturity Date |  | Amount |  |  | Dec. 31, 2017 |
2019 |  | Ps. | 4,024 |  |  | Ps. | (32 | ) |  |  | — |
2020 |  |  | 3,669 |  |  |  | (16 | ) |  |  | — |
2021 |  |  | 3,059 |  |  |  | (33 | ) |  |  | — |
20.6 Commodity price contracts The Company has entered into various commodity price contracts to reduce its exposure to the risk of fluctuation in the costs of certain raw material. The fair value is estimated based on the market valuations to terminate the contracts at the end of the period. These instruments are designated as Cash Flow Hedges and the changes in their fair value are recorded as part of “cumulative other comprehensive income”. The fair value of expired or sold commodity contracts are recorded in cost of goods sold with the hedged items. As of December 31, 2018, the Company had the following sugar price contracts:
|  |  |  | Fair value
|  | Notional |  | (Liability) |  | Asset
Maturity date |  | ammount |  | As of December 31, 2018
2019 |  | Ps. 1,223 |  | Ps. (88) |  | Ps. —
As of December 31, 2018, the Company has the following aluminum price contracts:
|  |  |  | Fair value
|  | Notional |  | (Liability) |  | Asset
Maturity date |  | ammount |  | As of December 31, 2018
2019 |  | Ps. 265 |  | Ps. (17) |  | Ps. —
As of December 31, 2018, the Company has the following PX + MEG price contracts
|  |  |  | Fair value
|  | Notional |  | (Liability) |  | Asset
Maturity date |  | ammount |  | As of December 31, 2018
2019 |  | Ps.1,303 |  | Ps. (131) |  | Ps. —
As of December 31, 2017, the Company had the following sugar price contracts:
|  |  |  |  | Fair Value |
|  | Notional |  |  | (Liability) |  |  | Asset |
Maturity Date |  | Amount |  |  | Dec 31, 2017 |
2018 |  | Ps. | 986 |  |  | Ps. | (26 | ) |  | Ps. | 19 |
2019 |  |  | 150 |  |  |  | — |  |  |  | 3 |
20.7 Option embedded in the Promissory Note to fund the Vonpar’s acquisition As disclosed in Note 4.1.2, on December 6, 2016, as part of the purchase price paid for the Company’s acquisition of Vonpar, Spal issued and delivered a three-year promissory note to the sellers, for a total amount of 1,166 million Brazilian reais. On November 14, 2018 Spal prepaid an amount for 103 million of USD (393 million of Brazilian real) (and the amount left as of December 31, 2018 is 916 million of Brazilian real (approximately Ps. 4,652) The promissory note bears interest at an annual rate of 0.375%, and is denominated and payable in Brazilian reais. The promissory note is linked to the performance of the exchange rate between the Brazilian real and the U.S. dollar. As a result, the principal amount under the promissory note may be increased or reduced based on the depreciation or appreciation of the Brazilian real relative to the U.S. dollar. The holders of the promissory note have an option, that may be exercised prior to the scheduled maturity of the promissory note, to capitalize the Mexican peso amount equivalent to the amount payable under the promissory note into a recently incorporated Mexican company which would then be merged into the Company in exchange for Series L shares at a strike price of Ps.178.5 per share. Such capitalization and issuance of new Series L shares is subject to the Company having a sufficient number of Series L shares available for issuance. The Company uses Black & Scholes valuation technique to measure call the option at fair value. The Black & Scholes valuation method was chosen because it is a method commonly used to value this type of financial instruments. The call option had an estimated fair value of Ps. 343 million at inception of the option and Ps. 14 and Ps. 242 million as of December 31, 2018 and 2017, respectively. The option is as part of the Promissory Note disclosed in Note 18. The Company estimates that the call option is “out of the money” as of December 31, 2018 and 2017 by approximately 49.8% and 30.4% or US$ 111 million and US$ 82 million, respectively, relative to the strike price. 20.8 Net effects of expired contracts that met hedging criteria
Derivative |  | Impact in consolidated income statement |  | 2018 |  |  | 2017 |  |  | 2016 |
Cross currency swaps (1) |  | Interest expense |  | Ps. | 157 |  |  | Ps. | 2,102 |  |  | Ps. | — |
Cross currency swaps (1) |  | Foreign exchange |  |  | 642 |  |  |  | — |  |  |  | — |
Interest rate swaps |  | Interest expense |  |  | — |  |  |  | — |  |  |  | — |
Option to purchase foreign currency |  | Cost of good sold |  |  | (8 | ) |  |  | — |  |  |  | — |
Forward agreements to purchase foreign currency |  | Cost of good sold |  |  | 240 |  |  |  | 89 |  |  |  | (45 | )
Commodity Price contracts |  | Cost of good sold |  |  | (258 | ) |  |  | (6 | ) |  |  | (241 | )
(1) | The 2018 ammount belong to the Brazilian swaps maturity and the amount for 2017 belongs to the maturity of the Mexico swaps portafolio. Both amounts are disclosed as part of the financial activities in each year.
20.9 Net effect of changes in fair value of derivative financial instruments that did not meet the hedging criteria for accounting purposes.
Derivative |  | Impact in profit and loss |  | 2018 |  |  | 2017 |  |  | 2016 |
Forward agreements to purchase foreign currency |  | Market value gain (loss) on financial statements |  | Ps. | (12 | ) |  | Ps. | 12 |  |  | Ps. | (56 | )
Cross currency swaps |  | Market value (loss) gain on financial statements |  |  | (116 | ) |  |  | 337 |  |  |  | 236 |
20.10 Net effect of expired contracts that did not meet the hedging criteria for accounting purposes
Type of Derivatives |  | Impact in Consolidated Income Statement |  | 2018 |  |  | 2017 |  |  | 2016 |
Cross-currency swaps |  | Market value (loss) gain on financial instruments |  | Ps. | (186 | ) |  | Ps. | (104 | ) |  | Ps. | (129 | )
Embedded derivatives |  | Market value gain on financial instruments |  |  | — |  |  |  | 1 |  |  |  | — |
20.11 Risk management The Company has exposure to the following financial risks:
| • |  | Market risk;
| • |  | Interest rate risk;
| • |  | Liquidity risk; and
| • |  | Credit risk
The Company determines the existence of an economic relationship between the hedging instruments and the hedged item based on the currency, amount and timing of their respective cash flows. The Company evaluates whether the derivative designated in each hedging relationship is expected to be effective and that it has been effective to offset changes in the cash flows of the hedged item using the hypothetical derivative method. In these hedging relationships, the main sources of inefficiency are:
| • |  | The effect of the credit risk of the counterparty and the Company on the fair value of foreign currency forward contracts, which is not reflected in the change in the fair value of the hedged cash flows attributable to change in the types of change; and
| • |  | Changes in the periodicity of covered.
20.11.1 Market risk The Company’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates, interest rates and commodity prices. The Company enters into a variety of derivative financial instruments to manage its exposure to foreign currency risk, interest rates risk and commodity prices risk including:
• |  | Forward Agreements to Purchase Foreign Currency in order to reduce its exposure to the risk of exchange rate fluctuations.
| • |  | Options to purchase foreign currency in order to reduce its exposure to the risk of exchange rate fluctuations.
| • |  | Cross-Currency Swaps in order to reduce its exposure to the risk of exchange rate fluctuations and interest rate changes.
| • |  | Commodity price contracts in order to reduce its exposure to the risk of fluctuation in the costs of certain raw materials.
The Company tracks the fair value (mark to market) of its derivative financial instruments and its possible changes using scenario analyses. The following disclosures provide a sensitivity analysis of the market risks, which the Company is exposed to as it relates to foreign exchange rates, interests rates and commodity prices, which it considers in its existing hedging strategy:
Forward agreement to purchase U.S. Dollar (MXN/USD) |  | Change in USD rate |  |  | Effect on equity |  |  | Profit and loss effect |
2018 |  |  | (13 | %) |  | Ps. | (365 | ) |  | Ps. | — |
2017 |  |  | (12 | %) |  |  | (602 | ) |  |  | — |
2016 |  |  | (17 | %) |  |  | (916 | ) |  |  | — |
Forward agreement to purchase U.S. Dollar (BRL/USD) |  | Change in USD rate |  |  | Effect on equity |  |  | Profit and loss effect |
2018 |  |  | (16 | %) |  | Ps. | (413 | ) |  | Ps. | — |
2017 |  |  | (14 | %) |  |  | (234 | ) |  |  | — |
2016 |  |  | (18 | %) |  |  | (203 | ) |  |  | — |
Forward agreement to purchase U.S. Dollar (COP/USD) |  | Change in USD rate |  |  | Effect on equity |  |  | Profit and loss effect |
2018 |  |  | (12 | %) |  | Ps. | (2 | ) |  | Ps. | — |
2017 |  |  | (9 | %) |  |  | (73 | ) |  |  | — |
2016 |  |  | (18 | %) |  |  | (255 | ) |  |  | — |
Forward agreement to purchase U.S. Dollar (ARS/USD) |  | Change in USD rate |  |  | Effect on equity |  |  | Profit and loss effect |
2018 |  |  | (27 | %) |  | Ps. | (522 | ) |  | Ps. | — |
2017 |  |  | (10 | %) |  |  | (29 | ) |  |  | — |
Forward agreement to purchase U.S. Dollar (UYU/USD) |  | Change in USD rate |  |  | Effect on equity |  |  | Profit and loss effect |
2018 |  |  | (8 | %) |  | Ps. | (46 | ) |  | Ps. | — |
Cross currency swaps (USD to MXN) |  | Change in USD rate |  |  | Effect on equity |  |  | Profit and loss effect |
2018 |  |  | (13 | %) |  | Ps. | (3,130 | ) |  | Ps. | — |
2017 |  |  | (12 | %) |  |  | (3,540 | ) |  |  | — |
2016 |  |  | (17 | %) |  |  | (3,687 | ) |  |  | (1,790 | )
Cross currency swaps (USD en BRL) |  | Change in USD rate |  |  | Effect on equity |  |  | Profit and loss effect |
2018 |  |  | (16 | %) |  | Ps. | (9,068 | ) |  | Ps. | — |
2017 |  |  | (14 | %) |  |  | (7,483 | ) |  |  | — |
2016 |  |  | (18 | %) |  |  | (9,559 | ) |  |  | — |
Interest rate swaps (floating to fixed rates) |  | Change in BRL rate |  |  | Effect on equity |  |  | Profit and loss effect |
2018 |  |  | (100 bps | ) |  | Ps. | (1,976 | ) |  | Ps. | — |
2017 |  |  | (100 bps | ) |  | Ps. | (234 | ) |  | Ps. | — |
Sugar price contracts |  | Change on sugar Price |  |  | Effect on equity |  |  | Profit and loss effect |
2018 |  |  | (30 | %) |  | Ps. | (341 | ) |  | Ps. | — |
2017 |  |  | (30 | %) |  |  | (32 | ) |  |  | — |
2016 |  |  | (33 | %) |  |  | (310 | ) |  |  | — |
Alluminum price contracts |  | Change on Alluminum price |  |  | Effect on equity |  |  | Profit and loss effect |
2018 |  |  | (22 | %) |  |  | Ps. | (55) |  |  | Ps.— |
2016 |  |  | (16 | %) |  |  | (13 | ) |  |  | — |
Options to purchase foreign currency (MXN en USD) |  | Change on USD rate |  |  | Effect on equity |  |  | Profit and loss effect |
2018 |  |  | (13 | %) |  |  | Ps. | (303) |  |  | Ps.— |
2017 |  |  | (12 | %) |  |  | Ps. | (24) |  |  | Ps.— |
20.11.2 Interest rate risk Interest rate risk is the risk that the fair value or future cash flow of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk because it and its subsidiaries borrow funds at both fixed and variable interest rates. The risk is managed by the Company by maintaining an appropriate mix between fixed and variable rate borrowings, and by the use of the different derivative financial instruments. Hedging activities are evaluated regularly to align with interest rate views and defined risk appetite, ensuring the most cost-effective hedging strategies are applied. The following disclosures provide a sensitivity analysis of the interest rate risks, management considered to be reasonably possible at the end of the reporting period, which the Company is exposed to as it relates to its fixed and floating rate borrowings, which considers its existing hedging strategy:
Interest Rate Risk |  | Change in U.S.$ Rate |  |  | Effect on (Profit) or Loss |
2018 |  |  | +100 bps |  |  |  | Ps. | (134)
2017 |  |  | +100 bps |  |  |  | (251 | )
2016 |  |  | +100 bps |  |  |  | (211 | )
20.11.3 Liquidity risk The Company’s principal source of liquidity has generally been cash generated from its operations. A significant majority of the Company’s sales are on a short-term credit basis. The Company has traditionally been able to rely on cash generated from operations to fund its capital requirements and its capital expenditures. The Company’s working capital benefits from the fact that most of its sales are made on a cash basis, while it’s generally pays its suppliers on credit. In recent periods, the Company has mainly used cash generated from operations to fund acquisitions. The Company has also used a combination of borrowings from Mexican and international banks and issuances in the Mexican and international capital markets to fund acquisitions. Ultimate responsibility for liquidity risk management rests with the Company’s board of directors, which has established an appropriate liquidity risk management framework for the evaluation of the Company’s short-, medium- and long-term funding and liquidity requirements. The Company manages liquidity risk by maintaining adequate reserves, and continuously monitoring forecasted and actual cash flows and by maintaining a conservative debt maturity profile. The Company has access to credit from national and international banking institutions in order to face treasury needs; besides, the Company has the highest rating for Mexican companies (AAA) given by independent rating agencies, allowing the Company to evaluate capital markets in case it needs resources. As part of the Company’s financing policy, management expects to continue financing its liquidity needs with cash from operations. Nonetheless, as a result of regulations in certain countries in which the Company operates, it may not be beneficial or, practicable to remit cash generated in local operations to fund cash requirements in other countries. In the event that cash from operations in these countries is not sufficient to fund future working capital requirements and capital expenditures, management may decide, or be required, to fund cash requirements in these countries through local borrowings rather than remitting funds from another country. In the future management may finance our working capital and capital expenditure needs with short-term or other borrowings. The Company’s management continuously evaluates opportunities to pursue acquisitions or engage in strategic transactions. The Company would expect to finance any significant future transactions with a combination of cash from operations, long-term indebtedness and capital stock. See Note 18 for a disclosure of the Company’s maturity dates associated with its non-current financial liabilities as of December 31, 2018. The following table reflects all contractually fixed and variable pay-offs for settlement, repayments and interest resulting from recognized financial liabilities. It includes expected gross cash outflows from derivative financial liabilities that are in place as of December 31, 2018. Such expected net cash outflows are determined based on each particular settlement date of an instrument. The amounts disclosed are undiscounted net cash outflows for the respective upcoming fiscal years, based on the earliest date on which the Company could be required to pay. Cash outflows for financial liabilities (including interest) without fixed amount or timing are based on economic conditions (like interest rates and foreign exchange rates) existing at December 31, 2018.
(In millions of Ps) |  | 2019 |  |  | 2020 |  |  | 2021 |  |  | 2022 |  |  | 2023 |  |  | 2024 and thereafter |
Non-derivative financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Notes and bonds |  | Ps. | 4,657 |  |  | Ps. | 9,829 |  |  | Ps. | 2,498 |  |  | Ps. | 1,497 |  |  | Ps. | 25,052 |  |  | Ps. | 20,306 |
Loans from banks |  |  | 6,936 |  |  |  | 1,324 |  |  |  | 9,560 |  |  |  | 73 |  |  |  | 38 |  |  |  | 24 |
Derivatives financial liabilities (assets) |  |  | 450 |  |  |  | 777 |  |  |  | 477 |  |  |  | — |  |  |  | (255 | ) |  |  | 160 |
Financial leasing |  |  | 10 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
The Company generally makes payments associated with its financial liabilities with cash generated from its operations. 20.11.4 Credit risk Credit risk refers to the risk that counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company has adopted a policy of only dealing with creditworthy counterparties, where appropriate, as a means of mitigating the risk of financial loss from defaults. The Company only transacts with entities that are rated the equivalent of investment grade and above. This information is supplied by independent rating agencies where available and, if not available, the Company uses other publicly available financial information and its own trading records to rate its major customers. The Company’s exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions is spread amongst approved counterparties. The Company has a high receivable turnover; hence management believes credit risk is minimal due to the nature of its businesses, which have a large portion of their sales settled in cash. The Company’s maximum exposure to credit risk for the components of the statement of financial position at December 31, 2018 and 2017 is the carrying amounts (see Note 7). The credit risk for liquid funds and derivative financial instruments is limited because the parts are credit high-graded banks designated by international credit rating agencies The Company manages the credit risk related to its derivative portfolio by only entering into transactions with reputable and credit-worthy counterparties as well as by maintaining a Credit Support Annex (CSA) that establishes margin requirements. As of December 31, 2018 the Company concluded that the maximum exposure to credit risk related with derivative financial instruments is not significant given the high credit rating of its counterparties. 20.12 Cash Flow hedges As of December 31, 2018, the Company’s financial instruments used to hedge its exposure to foreign exchange rates, interest rates and commodity risks were as follows:
Maturity |
|  | 1-6 months |  |  | 6-12 months |  |  | More than 12 |
Foreign exchange currency risk |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange currency forward contracts |  |  |  |  |  |  |  |  |  |  |  |
Net exposure (in millions of pesos) |  |  | 3,484 |  |  |  | 683 |  |  |  | — |
Average exchange rate MXN/USD |  |  | 20.19 |  |  |  | 20.75 |  |  |  | — |
Net exposure (in millions of pesos) |  |  | 805 |  |  |  | 337 |  |  |  | — |
Average exchange rate BRL/USD |  |  | 3.75 |  |  |  | 3.83 |  |  |  | — |
Net exposure (in millions of pesos) |  |  | 429 |  |  |  | 63 |  |  |  | — |
Average exchange rate COP/USD |  |  | 2,851 |  |  |  | 2,976 |  |  |  | — |
Net exposure (in millions of pesos) |  |  | 339 |  |  |  | — |  |  |  | — |
Average exchange rate ARS/USD |  |  | 43.31 |  |  |  | — |  |  |  | — |
Net exposure (in millions of pesos) |  |  | 196 |  |  |  | 159 |  |  |  | — |
Average exchange rate UYU/USD |  |  | 32.9 |  |  |  | 33.97 |  |  |  | — |
Foreign exchange currency swap contracts |  |  |  |  |  |  |  |  |  |  |  |
Net exposure (in millions of pesos) |  |  | — |  |  |  | — |  |  |  | 18,502 |
Average exchange rate MXN/USD |  |  | — |  |  |  | — |  |  |  | 19.72 |
Net exposure (in millions of pesos) |  |  | — |  |  |  | 4,652 |  |  |  | 18,042 |
Average exchange rate BRL/USD |  |  | — |  |  |  | 3.36 |  |  |  | 3.59 |
Interest rate risk |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  |  |  |  |  |  |  |  |  |  |  |
Net exposure (in millions of pesos) |  |  | — |  |  |  | 4,013 |  |  |  | 8,594 |
Average interest rate |  |  | — |  |  |  | 6.29 | % |  |  | 8.15 | %
Commodities risk |  |  |  |  |  |  |  |  |  |  |  |
Aluminum |  |  | 189 |  |  |  | 75 |  |  |  | — |
Average price (USD/Ton) |  |  | 1,975 |  |  |  | 1,986 |  |  |  | — |
Sugar |  |  | 725 |  |  |  | 498 |  |  |  | — |
Average price (USD cent/Lb) |  |  | 12.86 |  |  |  | 13.11 |  |  |  | — |
PX+MEG |  |  | 739 |  |  |  | 565 |  |  |  | — |
Average price (USD /Ton) |  |  | 1,077 |  |  |  | 1,040 |  |  |  | — |
As of December 31, 2017, the Company’s financial instruments used to hedge its exposure to foreign exchange rates, interest rates and commodity risks were as follows:
Maturity |
|  | 1-6 months |  |  | 6-12 months |  |  | More than 12 |
Foreign exchange currency risk |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange currency forward contracts |  |  |  |  |  |  |  |  |  |  |  |
Net exposure (in millions of pesos) |  |  | 3,391 |  |  |  | 978 |  |  |  | — |
Average exchange rate MXN/USD |  |  | 19.62 |  |  |  | 19.42 |  |  |  | — |
Net exposure (in millions of pesos) |  |  | 1,332 |  |  |  | 136 |  |  |  | — |
Average exchange rate BRL/USD |  |  | 3.22 |  |  |  | 3.25 |  |  |  | — |
Net exposure (in millions of pesos) |  |  | 647 |  |  |  | 116 |  |  |  | — |
Average exchange rate COP/USD |  |  | 3,017 |  |  |  | 3,014 |  |  |  | — |
Net exposure (in millions of pesos) |  |  | 280 |  |  |  | — |  |  |  | — |
Average exchange rate ARS/USD |  |  | 18.56 |  |  |  | — |  |  |  | — |
Foreign exchange currency swap contracts |  |  |  |  |  |  |  |  |  |  |  |
Net exposure (in millions of pesos) |  |  | — |  |  |  | — |  |  |  | 18,552 |
Average exchange rate MXN/USD |  |  | — |  |  |  | — |  |  |  | 19.72 |
Net exposure (in millions of pesos) |  |  | 6,414 |  |  |  | 17,939 |  |  |  | 14,880 |
Average exchange rate BRL/USD |  |  | 3.82 |  |  |  | 3.83 |  |  |  | 3.37 |
Interest rate risk |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  |  |  |  |  |  |  |  |  |  |  |
Net exposure (in millions of pesos) |  |  | — |  |  |  | — |  |  |  | 10,752 |
Average interest rate |  |  | — |  |  |  | — |  |  |  | 7.58 | %
Commodities risk |  |  |  |  |  |  |  |  |  |  |  |
Sugar |  |  | 710 |  |  |  | 428 |  |  |  | — |
Average price (USD cent/Lb) |  |  | 14.79 |  |  |  | 15.23 |  |  |  | — |
As of December 31, 2018, the Company includes the following cash flows hedge exposures:
In millions of pesos |  | Cash flow hedge reserve |  |  | Cash flow hedge costs |  |  | Remained balances of cash flow hedge reserve from which hedge accounting is not applied |
Foreign exchange currency risk |  |  |  |  |  |  |  |  |  |  |  |
Net sales, trade account receivables and borrowings |  |  | — |  |  |  | — |  |  |  | — |
Purchase of stock |  |  | 1 |  |  |  | 22 |  |  |  | — |
Interest rate risk |  |  |  |  |  |  |  |  |  |  |  |
Interest rate instruments |  |  | — |  |  |  | — |  |  |  | — |
As of December 31, 2017, the Company includes the following cash flows hedge exposures:
In millions of pesos |  | Cash flow hedge reserve |  |  | Cash flow hedge costs |  |  | Remained balances of cash flow hedge reserve from which hedge accounting is not applied |
Foreign exchange currency risk |  |  |  |  |  |  |  |  |  |  |  |
Net sales, trade account receivables and borrowings |  |  | — |  |  |  | — |  |  |  | — |
Purchase of stock |  |  | — |  |  |  | 11 |  |  |  | — |
Interest rate risk |  |  |  |  |  |  |  |  |  |  |  |
Interest rate instruments |  |  | — |  |  |  | — |  |  |  | — |
As of December 31, 2018, cash flow financial instruments amounts and its related non-effective portion were as follows:
In millions of pesos |  | Notional |  |  | Assets |  |  | Liabilities |  |  | Financial position category in which the cash flow hedge is included
Foreign exchange currency risk |  |  |  |  |  |  |  |  |  |  |  |  |  |
Forward contracts: Net sales, trade accounts receivables and borrowings |  |  | — |  |  |  | — |  |  |  | — |  |  | Other investments including financial derivatives (assets), trade accounts payable (liabilities)
Purcahse of stock |  |  | 4,768 |  |  |  | 109 |  |  |  | (66 | ) |  |
Exchange rate swaps |  |  | 41,195 |  |  |  | 2,390 |  |  |  | (511 | ) |  |
Interest rate risk |  |  |  |  |  |  |  |  |  |  |  |  |  |
Swap interest rate |  |  | 12,607 |  |  |  | — |  |  |  | (271 | ) |  | Other investments including financial derivatives (assets), trade accounts payable (liabilities)
Commodities risk |  |  |  |  |  |  |  |  |  |  |  |  |  |
Aluminum |  |  | 265 |  |  |  | — |  |  |  | (17 | ) |  |
Suggar |  |  | 1,223 |  |  |  | — |  |  |  | (88 | ) |  |
PX+MEG |  |  | 1,303 |  |  |  | — |  |  |  | (131 | ) |

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