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DERIVATIVE INSTRUMENTS

12 Months Ended

Oct. 31, 2021

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, 2021 and November 1, 2020 were $2,700 million and $1,550 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 currency 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 October 31, 2021 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 $4 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 October 31, 2021 and November 1, 2020 were $8,043 million and $7,239 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 October 31, 2021 and November 1, 2020, 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
2021
Long-term borrowings due within one year*		$	189		$	3		$	(2)		$	1
Long-term borrowings			8,070			29			223			252
2020
Long-term borrowings due within one year*		$	155		$	2		$	3		$	5
Long-term borrowings			7,725			543			122			665

* Presented in short-term borrowings.

Derivatives Not Designated as Hedging Instruments

The company has certain interest rate contracts (swaps), foreign currency 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 October 31, 2021 and November 1, 2020 were $10,848 million and $8,514 million, the foreign currency exchange contracts were $7,584 million and $4,903 million, and the cross-currency interest rate contracts were $238 million and $113 million, respectively. The fair value gains or losses from the interest rate contracts were recognized currently in interest expense and the gains or losses from foreign currency 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, 2021 and November 1, 2020 in millions of dollars follow:


		2021			2020
Other Assets
Designated as hedging instruments:
Interest rate contracts		$	166		$	586
Not designated as hedging instruments:
Interest rate contracts			73			83
Foreign exchange contracts			31			48
Cross-currency interest rate contracts			5			8
Total not designated			109			139
Total derivative assets		$	275		$	725
Accounts Payable and Accrued Expenses
Designated as hedging instruments:
Interest rate contracts		$	99		$	14
Not designated as hedging instruments:
Interest rate contracts			33			74
Foreign exchange contracts			94			26
Cross-currency interest rate contracts			2			1
Total not designated			129			101
Total derivative liabilities		$	228		$	115

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:


		2021			2020			2019
Fair Value Hedges
Interest rate contracts – Interest expense		$	(236)		$	496		$	589

Cash Flow Hedges
Recognized in OCI:
Interest rate contracts – OCI (pretax)			8			(18)			(92)

Reclassified from OCI:
Interest rate contracts – Interest expense			(13)			(21)			5

Not Designated as Hedges
Interest rate contracts – Net sales		$	13		$	(23)		$	(23)
Interest rate contracts – Interest expense*			14			(2)			(32)
Foreign exchange contracts – Cost of sales			(101)			93			(18)
Foreign exchange contracts – Other operating expenses*			(262)			122			97
Total not designated		$	(336)		$	190		$	24

* 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 October 31, 2021 and November 1, 2020, was $135 million and $89 million, respectively. In accordance with the limits established in these agreements, the company posted no cash collateral at October 31, 2021 or November 1, 2020. In addition, the company paid $8 million of collateral either in cash or pledged securities that was outstanding at both October 31, 2021 and November 1, 2020 to participate in an international futures market to hedge currency exposure, not included in the table below.

Derivatives are recorded without offsetting for netting arrangements or collateral. The impact on the derivative assets and liabilities related to netting arrangements and collateral at October 31, 2021 and November 1, 2020 in millions of dollars follows:


		Gross Amounts			Netting						Net
		Recognized			Arrangements			Collateral			Amount
2021
Assets		$	275		$	(105)					$	170
Liabilities			228			(105)		$	(5)			118
2020
Assets		$	725		$	(93)		$	(274)		$	358
Liabilities			115			(93)						22