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DERIVATIVE INSTRUMENTS

12 Months Ended

Nov. 03, 2019

28. 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 November 3, 2019 and October 28, 2018 were $3,150 million and $3,050 million, respectively. During 2019, the company hedged a portion of its exposure to interest rate changes on a forecasted debt issuance using an interest rate contract with a term of 30 years. The hedge was terminated upon issuance of the debt, resulting in a fair value loss of $70 million. Fair value gains or losses on cash flow hedges were recorded in OCI and are subsequently reclassified into interest expense or other operating expenses (foreign exchange) in the same periods during which the hedged transactions impact earnings. These amounts offset the effects of interest rate or foreign currency exchange rate changes on the related borrowings. 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 November 3, 2019 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 $8 million after-tax. 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 November 3, 2019 and October 28, 2018 were $8,717 million and $8,479 million, respectively. The fair value gains or losses on these contracts were generally offset by fair value gains or losses on the hedged items (fixed-rate borrowings) with both items recorded in interest expense.

The amounts recorded, at November 3, 2019, in the consolidated balance sheet related to borrowings designated in fair value hedging relationships in millions of dollars follow:


			Cumulative Increase (Decrease) of
			Fair Value Hedging Adjustments
	Carrying		Included in the Carrying Amount
	Amount of		Active
	Hedged		Hedging		Discontinued
	Item		Relationships		Relationships		Total
Long-term borrowings due within one year*	$	412	$	(1)	$	(4)	$	(5)
Long-term borrowings		8,532		295		(32)		263

* Presented in short-term borrowings.

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, purchases or sales of inventory, and below market retail financing programs. The total notional amounts of the interest rate swaps at November 3, 2019 and October 28, 2018 were $9,166 million and $8,075 million, the foreign exchange contracts were $4,962 million and $6,842 million, and the cross-currency interest rate contracts were $92 million and $81 million, respectively. To facilitate borrowings through securitization of retail notes, interest rate caps were sold with notional amounts of $6 million and $66 million at November 3, 2019 and October 28, 2018, respectively. Interest rate caps were also purchased with notional amounts of $6 million and $66 million, at the same dates. 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 November 3, 2019 and October 28, 2018 in millions of dollars follow:


	2019		2018
Other Assets
Designated as hedging instruments:
Interest rate contracts	$	332	$	29
Total designated		332		29
Not designated as hedging instruments:
Interest rate contracts		31		51
Foreign exchange contracts		20		83
Cross-currency interest rate contracts		1		5
Total not designated		52		139
Total derivative assets	$	384	$	168
Accounts Payable and Accrued Expenses
Designated as hedging instruments:
Interest rate contracts	$	28	$	321
Total designated		28		321
Not designated as hedging instruments:
Interest rate contracts		37		29
Foreign exchange contracts		71		49
Cross-currency interest rate contracts		3
Total not designated		111		78
Total derivative liabilities	$	139	$	399

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:


	2019		2018		2017
Fair Value Hedges
Interest rate contracts – Interest expense	$	589	$	(283)	$	(205)

Cash Flow Hedges
Recognized in OCI
Interest rate contracts – OCI (pretax)*		(92)		17		4
Foreign exchange contracts – OCI (pretax)*				2		(1)

Reclassified from OCI
Interest rate contracts – Interest expense*		5		5		(2)
Foreign exchange contracts – Other expense*				1		(1)

Not Designated as Hedges
Interest rate contracts – Net sales	$	(23)	$	3
Interest rate contracts – Interest expense*		(32)		(4)	$	11
Foreign exchange contracts – Cost of sales		(18)		(24)		(12)
Foreign exchange contracts – Other expense*		97		195		(106)
Total not designated	$	24	$	170	$	(107)

* Includes interest and foreign exchange gains (losses) from cross-currency

interest rate contracts.

Counterparty Risk and Collateral

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.

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 November 3, 2019 and October 28, 2018, was $68 million and $350 million, respectively. In accordance with the limits established in these agreements, the company posted none and $59 million in cash collateral at November 3, 2019 and October 28, 2018, respectively.

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 paid at November 3, 2019 and October 28, 2018 in millions of dollars follows:


	Gross Amounts		Netting		Collateral		Net
	Recognized		Arrangements		Paid		Amount
2019
Assets	$	384	$	(70)			$	314
Liabilities		139		(70)				69
2018
Assets	$	168	$	(65)			$	103
Liabilities		399		(65)	$	(59)		275