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DERIVATIVE INSTRUMENTS | 12 Months Ended
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Oct. 31, 2016
DERIVATIVE INSTRUMENTS |
DERIVATIVE INSTRUMENTS | 27. DERIVATIVE INSTRUMENTS Cash Flow Hedges Certain interest rate and cross-currency interest rate contracts (swaps) were designated as hedges of future cash flows from borrowings. The total notional amounts of the receive-variable/ pay-fixed interest rate contracts at October 31, 2016 and 2015 were $1,600 million and $2,800 million, respectively. The total notional amounts of the cross-currency interest rate contracts were $42 million and $60 million at October 31, 2016 and 2015, respectively. The effective portions of the fair value gains or losses on these cash flow hedges were recorded in other comprehensive income (OCI) and subsequently reclassified into interest expense or other operating expenses (foreign exchange) in the same periods during which the hedged transactions affected earnings. These amounts offset the effects of interest rate or foreign currency exchange rate changes on the related borrowings. Any ineffective portions of the gains or losses on all cash flow interest rate contracts designated as cash flow hedges were recognized currently in interest expense or other operating expenses (foreign exchange) and were not material during any years presented. The cash flows from these contracts were recorded in operating activities in the statement of consolidated cash flows. The amount of loss recorded in OCI at October 31, 2016 that is expected to be reclassified to interest expense or other operating expenses in the next twelve months if interest rates or exchange rates remain unchanged is approximately $1 million after-tax. These contracts mature in up to 26 months. There were no gains or losses reclassified from OCI to earnings based on the probability that the original forecasted transaction would not occur. Fair Value Hedges Certain interest rate contracts (swaps) were designated as fair value hedges of borrowings. The total notional amounts of the receive-fixed/pay-variable interest rate contracts at October 31, 2016 and 2015 were $8,844 million and $8,618 million, respectively. The effective portions of the fair value gains or losses on these contracts were offset by fair value gains or losses on the hedged items (fixed-rate borrowings). Any ineffective portions of the gains or losses were recognized currently in interest expense. The ineffective portions were a loss of $2 million and gain of $2 million in 2016 and 2015, respectively. The cash flows from these contracts were recorded in operating activities in the statement of consolidated cash flows. The gains (losses) on these contracts and the underlying borrowings recorded in interest expense follow in millions of dollars:
|  | 2016 |  | 2015 |
Interest rate contracts* |  | $ | 7 |  | $ | 104 |
Borrowings** |  |  | (9) |  |  | (102) |
* Includes changes in fair values of interest rate contracts excluding net accrued interest income of $146 million and $173 million during 2016 and 2015, respectively. ** Includes adjustments for fair values of hedged borrowings excluding accrued interest expense of $290 million and $274 million during 2016 and 2015, respectively. Derivatives Not Designated as Hedging Instruments The company has certain interest rate contracts (swaps and caps), foreign exchange contracts (futures, forwards and swaps) and cross-currency interest rate contracts (swaps), which were not formally designated as hedges. These derivatives were held as economic hedges for underlying interest rate or foreign currency exposures primarily for certain borrowings and purchases or sales of inventory. The total notional amounts of the interest rate swaps at October 31, 2016 and 2015 were $6,060 million and $6,333 million, the foreign exchange contracts were $3,919 million and $3,160 million and the cross-currency interest rate contracts were $63 million and $76 million, respectively. At October 31, 2016 and 2015, there were also $579 million and $1,069 million, respectively, of interest rate caps purchased and the same amounts sold at the same capped interest rate to facilitate borrowings through securitization of retail notes. The fair value gains or losses from the interest rate contracts were recognized currently in interest expense and the gains or losses from foreign exchange contracts in cost of sales or other operating expenses, generally offsetting over time the expenses on the exposures being hedged. The cash flows from these non-designated contracts were recorded in operating activities in the statement of consolidated cash flows. Fair values of derivative instruments in the consolidated balance sheet at October 31 in millions of dollars follow:
|  | 2016 |  | 2015 |
Other Assets |  |  |  |  |  |  |
Designated as hedging instruments: |  |  |  |  |  |  |
Interest rate contracts |  | $ | 268 |  | $ | 299 |
Cross-currency interest rate contracts |  |  | 11 |  |  | 14 |
Total designated |  |  | 279 |  |  | 313 |
Not designated as hedging instruments: |  |  |  |  |  |  |
Interest rate contracts |  |  | 26 |  |  | 54 |
Foreign exchange contracts |  |  | 60 |  |  | 50 |
Cross-currency interest rate contracts |  |  | 10 |  |  | 11 |
Total not designated |  |  | 96 |  |  | 115 |
Total derivative assets |  | $ | 375 |  | $ | 428 |
Accounts Payable and Accrued Expenses |  |  |  |  |  |  |
Designated as hedging instruments: |  |  |  |  |  |  |
Interest rate contracts |  | $ | 10 |  | $ | 8 |
Total designated |  |  | 10 |  |  | 8 |
Not designated as hedging instruments: |  |  |  |  |  |  |
Interest rate contracts |  |  | 19 |  |  | 52 |
Foreign exchange contracts |  |  | 43 |  |  | 18 |
Total not designated |  |  | 62 |  |  | 70 |
Total derivative liabilities |  | $ | 72 |  | $ | 78 |
The classification and gains (losses) including accrued interest expense related to derivative instruments on the statement of consolidated income consisted of the following in millions of dollars:
|  | 2016 |  | 2015 |  | 2014 |
Fair Value Hedges |  |  |  |  |  |  |  |  |  |
Interest rate contracts – Interest expense |  | $ | 153 |  | $ | 277 |  | $ | 155 |
Cash Flow Hedges |  |  |  |  |  |  |  |  |  |
Recognized in OCI |  |  |  |  |  |  |  |  |  |
(Effective Portion): |  |  |  |  |  |  |  |  |  |
Interest rate contracts – OCI (pretax)* |  |  | (3) |  |  | (16) |  |  | (10) |
Foreign exchange contracts – OCI (pretax)* |  |  | 1 |  |  | 4 |  |  | (4) |
Reclassified from OCI |  |  |  |  |  |  |  |  |  |
(Effective Portion): |  |  |  |  |  |  |  |  |  |
Interest rate contracts – Interest expense* |  |  | (7) |  |  | (12) |  |  | (13) |
Foreign exchange contracts – Other expense* |  |  | 1 |  |  | 4 |  |  | (6) |
Recognized Directly in Income |  |  |  |  |  |  |  |  |  |
(Ineffective Portion) |  |  | ** |  |  | ** |  |  | ** |
Not Designated as Hedges |  |  |  |  |  |  |  |  |  |
Interest rate contracts – Interest expense* |  | $ | (1) |  | $ | (17) |  | $ | 3 |
Foreign exchange contracts – Cost of sales |  |  | (15) |  |  | 97 |  |  | 25 |
Foreign exchange contracts – Other expense* |  |  | 74 |  |  | 304 |  |  | 79 |
Total not designated |  | $ | 58 |  | $ | 384 |  | $ | 107 |
* Includes interest and foreign exchange gains (losses) from cross-currency interest rate contracts. ** The amounts are not significant. Counterparty Risk and Collateral Certain of the company’s derivative agreements contain credit support provisions that may require the company to post collateral based on the size of the net liability positions and credit ratings. The aggregate fair value of all derivatives with credit-risk-related contingent features that were in a net liability position at October 31, 2016 and October 31, 2015, was $29 million and $41 million, respectively. The company, due to its credit rating and amounts of net liability position, has not posted any collateral. If the credit-risk-related contingent features were triggered, the company would be required to post collateral up to an amount equal to this liability position, prior to considering applicable netting provisions. Derivative instruments are subject to significant concentrations of credit risk to the banking sector. The company manages individual counterparty exposure by setting limits that consider the credit rating of the counterparty, the credit default swap spread of the counterparty and other financial commitments and exposures between the company and the counterparty banks. All interest rate derivatives are transacted under International Swaps and Derivatives Association (ISDA) documentation. Some of these agreements include credit support provisions. Each master agreement permits the net settlement of amounts owed in the event of default or termination. Derivatives are recorded without offsetting for netting arrangements or collateral. The impact on the derivative assets and liabilities related to netting arrangements and any collateral received or paid at October 31 in millions of dollars follows:
|  | Gross Amounts |  | Netting |  | Collateral |  | Net |
|  | Recognized |  | Arrangements |  | Received |  | Amount |
2016 |  |  |  |  |  |  |  |  |  |  |  |  |
Assets |  | $ | 375 |  | $ | (32) |  | $ | (6) |  | $ | 337 |
Liabilities |  |  | 72 |  |  | (32) |  |  |  |  |  | 40 |
2015 |  |  |  |  |  |  |  |  |  |  |  |  |
Assets |  | $ | 428 |  | $ | (62) |  |  |  |  | $ | 366 |
Liabilities |  |  | 78 |  |  | (62) |  |  |  |  |  | 16 |

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