FINANCIAL INSTRUMENTS

RECURRING FAIR VALUE MEASUREMENTS

Our assets and liabilities measured at fair value on a recurring basis consists of derivative instruments and investment securities.



	June 30, 2018										December 31, 2017
	Level 1		Level 2			Level 3		Net Balance			Level 1		Level 2			Level 3		Net Balance
Assets
Derivatives	$	—	$	221		$	—	$	221		$	—	$	150		$	—	$	150
Investment securities	66		—			310		376			81		8			304		393
Total assets	66		221			310		597			81		158			304		543

Liabilities
Derivatives	—		(248		)	—		(248		)	—		(95		)	—		(95		)
Total liabilities	$	—	$	(248	)	$	—	$	(248	)	$	—	$	(95	)	$	—	$	(95	)

There were no transfers between Level 1, 2 and 3 during the six months ended June 30, 2018.

The following table provides a reconciliation of recurring Level 3 fair value measurements for investment securities:



Balance at December 31, 2017	$	304
Purchases	36
Proceeds at maturity	(30		)
Balance at June 30, 2018	$	310

The most significant unobservable input used in the valuation of our Level 3 instruments is the discount rate. Discount rates are determined based on inputs that market participants would use when pricing investments, including credit and liquidity risk. An increase in the discount rate would result in a decrease in the fair value of our investment securities. There are no unrealized gains or losses recognized in the condensed consolidated and combined statement of income (loss) on account of any Level 3 instrument still held at the reporting date. At June 30, 2018 and December 31, 2017, we held $156 million and $127 million, respectively, of these investment securities on behalf of GE.



	June 30, 2018								December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Investment securities
Non-U.S. debt securities	$	309	$	1	$	—	$	310	$	310	$	2	$	—	$	312
Equity securities	66		—		—		66		81		—		—		81
Total	$	375	$	1	$	—	$	376	$	391	$	2	$	—	$	393

All of our non-U.S. debt securities are classified as available for sale instruments and mature within three years.

FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS

Our financial instruments include cash, cash equivalents and restricted cash, current receivables, investments, accounts payable, short and long-term debt, and derivative financial instruments. Except for long-term debt, the estimated fair value of these financial instruments at June 30, 2018 and December 31, 2017 approximates their carrying value as reflected in our condensed consolidated and combined financial statements. For further information on the fair value of our debt, see "Note 9. Borrowings."

DERIVATIVES AND HEDGING

We use derivatives to manage our risks and do not use derivatives for speculation.

The table below summarizes the fair value of all derivatives, including hedging instruments and embedded derivatives.



	June 30, 2018					December 31, 2017
	Assets		(Liabilities)			Assets		(Liabilities)
Derivatives accounted for as hedges
Currency exchange contracts	$	2	$	(1	)	$	6	$	—

Derivatives not accounted for as hedges
Currency exchange contracts	219		(247		)	144		(95		)
Total derivatives	$	221	$	(248	)	$	150	$	(95	)

Derivatives are classified in the captions "All other current assets," "All other assets," "All other current liabilities," and "All other liabilities" depending on their respective maturity date.

RISK MANAGEMENT STRATEGY

We buy, manufacture and sell components and products as well as provide services across global markets. These activities expose us to changes in foreign currency exchange rates and commodity prices, which can adversely affect revenues earned and costs of operating our business. When the currency in which we sell equipment differs from the primary currency (known as its functional currency) and the exchange rate fluctuates, it will affect the revenue we earn on the sale. These sales and purchase transactions also create receivables and payables denominated in foreign currencies, along with other monetary assets and liabilities, which expose us to foreign currency gains and losses based on changes in exchange rates. Changes in the price of a raw material that we use in manufacturing can affect the cost of manufacturing. We use derivatives to mitigate or eliminate these exposures.

FORMS OF HEDGING

Cash Flow Hedges

We use cash flow hedging primarily to reduce or eliminate the effects of foreign exchange rate changes on purchase and sale contracts. Accordingly, the vast majority of our derivative activity in this category consists of currency exchange contracts. We also use commodity derivatives to reduce or eliminate price risk on raw materials purchased for use in manufacturing.

Economic Hedges

These derivatives are not designated as hedges from an accounting standpoint (and therefore we do not apply hedge accounting to the relationship) but otherwise serve the same economic purpose as other hedging arrangements. Some economic hedges are used when changes in the carrying amount of the hedged item are already recorded in earnings in the same period as the derivative, making hedge accounting unnecessary. For some other types of economic hedges, changes in the fair value of the derivative are recorded in earnings currently but changes in the value of the forecasted foreign currency cash flows are only recognized in earnings when they occur. As a result, even though the derivative is an effective economic hedge, there is a net effect on earnings in each period due to differences in the timing of earnings recognition between the derivative and the hedged item. These derivatives are marked to fair value through earnings each period.

NOTIONAL AMOUNT OF DERIVATIVES

The notional amount of a derivative is the number of units of the underlying (for example, the notional principal amount of the debt in an interest rate swap). A substantial majority of the outstanding notional amount of $10.5 billion and $10.2 billion at June 30, 2018 and December 31, 2017, respectively, is related to hedges of anticipated sales and purchases in foreign currency, commodity purchases, and contractual terms in contracts that are considered embedded derivatives and for intercompany borrowings in foreign currencies. We generally disclose derivative notional amounts on a gross basis to indicate the total counterparty risk. Where we have gross purchase and sale derivative contracts for a particular currency, we look to execute these contracts with the same counterparty to reduce our exposure. The corresponding net notional amounts were $2.8 billion and $3.3 billion at June 30, 2018 and December 31, 2017, respectively.

The table below provides additional information about how derivatives are reflected in our condensed consolidated and combined financial statements.



Carrying amount related to derivatives	June 30, 2018			December 31, 2017
Derivative assets	$	221		$	150
Derivative liabilities	(248		)	(95		)
Net derivatives	$	(27	)	$	55

EFFECTS OF DERIVATIVES ON EARNINGS

All derivatives are marked to fair value on our condensed consolidated and combined statement of financial position, whether they are designated in a hedging relationship for accounting purposes or are used as economic hedges. As discussed in the previous sections, each type of hedge affects the financial statements differently. In some economic hedges, both the hedged item and the hedging derivative offset in earnings in the same period. In other economic hedges, the hedged item and the hedging derivative offset in earnings in different periods. In cash flow, the effective portion of the hedging derivative is offset in separate components of equity and ineffectiveness is recognized in earnings. The table below summarizes these offsets and the net effect on pre-tax earnings.



	Three Months Ended June 30,												Six Months Ended June 30,
	Cash Flow Hedges						Economic Hedges						Cash Flow Hedges						Economic Hedges
	2018			2017			2018			2017			2018			2017			2018			2017
Effect on hedging instrument	$	(7	)	$	4		$	(10	)	$	9		$	1		$	2		$	7		$	1
Effect on underlying	7			(4		)	(9		)	(9		)	(1		)	(2		)	(24		)	—
Effect on earnings ⁽¹⁾	$	—		$	—		$	(19	)	$	—		$	—		$	—		$	(17	)	$	1


⁽¹⁾	For cash flow hedges, the effect on earnings, if any, is primarily related to ineffectiveness. For economic hedges on forecasted transactions, the effect on earnings is substantially offset by future earnings on economically hedged items.

Changes in the fair value of cash flow hedges are recorded in a separate component of equity (referred to below as Accumulated Other Comprehensive Income, or AOCI) and are recorded in earnings in the period in which the hedged transaction occurs. The table below summarizes this activity by hedging instrument.



	Three Months Ended June 30,										Six Months Ended June 30,
	Gain (Loss) Recognized in AOCI					Gain (Loss) Reclassified from AOCI to Earnings					Gain (Loss) Recognized in AOCI				Gain (Loss) Reclassified from AOCI to Earnings
	2018			2017		2018		2017			2018		2017		2018		2017
Currency exchange contracts	$	(7	)	$	4	$	—	$	(2	)	$	1	$	2	$	—	$	(8	)

We expect to transfer $2 million to earnings as an expense in the next 12 months contemporaneously with the earnings effects of the related forecast transactions. At June 30, 2018 and December 31, 2017, the maximum term of derivative instruments that hedge forecast transactions was two-years and three-years, respectively. See "Note 12. Equity" for additional information about reclassification out of accumulated other comprehensive income.

For cash flow hedges, the amount of ineffectiveness in the hedging relationship and amount of the changes in fair value of the derivatives that are not included in the measurement of ineffectiveness were insignificant for each reporting period.

COUNTERPARTY CREDIT RISK

Fair values of our derivatives can change significantly from period to period based on, among other factors, market movements and changes in our positions. We manage counterparty credit risk (the risk that counterparties will default and not make payments to us according to the terms of our agreements) on an individual counterparty basis.