DERIVATIVES AND HEDGING ACTIVITIES

Cash Flow Hedges

Delphi is exposed to market risk, such as fluctuations in foreign currency exchange rates, commodity prices and changes in interest rates, which may result in cash flow risks. To manage the volatility relating to these exposures, Delphi aggregates the exposures on a consolidated basis to take advantage of natural offsets. For exposures that are not offset within its operations, Delphi enters into various derivative transactions pursuant to its risk management policies, which prohibit holding or issuing derivative financial instruments for speculative purposes, and designation of derivative instruments is performed on a transaction basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the fair value or cash flows of the underlying exposures being hedged. Delphi assesses the initial and ongoing effectiveness of its hedging relationships in accordance with its documented policy.

As of June 30, 2016, the Company had the following outstanding notional amounts related to commodity and foreign currency forward contracts designated as cash flow hedges that were entered into to hedge forecasted exposures:



Commodity	Quantity Hedged	Unit of Measure	Notional Amount (Approximate USD Equivalent)

	(in thousands)		(in millions)
Copper	54,580	pounds	$	115



Foreign Currency	Quantity Hedged	Unit of Measure	Notional Amount (Approximate USD Equivalent)

	(in millions)
Mexican Peso	9,798	MXN	$	520
Chinese Yuan Renminbi	2,059	RMB	310
Polish Zloty	318	PLN	80
New Turkish Lira	189	TRY	65
Hungarian Forint	17,281	HUF	60

The Company had additional commodity and foreign currency forward contracts designated as cash flow hedges with notional amounts that individually amounted to less than $10 million. As of June 30, 2016, Delphi has entered into derivative instruments to hedge cash flows extending out to June 2018.

Gains and losses on derivatives qualifying as cash flow hedges are recorded in other comprehensive income ("OCI"), to the extent that hedges are effective, until the underlying transactions are recognized in earnings. Unrealized amounts in accumulated OCI will fluctuate based on changes in the fair value of hedge derivative contracts at each reporting period. Losses included in accumulated OCI as of June 30, 2016 were approximately $83 million (approximately $62 million, net of tax). Of this total, approximately $77 million of losses are expected to be included in cost of sales within the next 12 months and $6 million of losses are expected to be included in cost of sales in subsequent periods. Cash flow hedges are discontinued when Delphi determines it is no longer probable that the originally forecasted transactions will occur. The amount included in cost of sales related to cash flow hedge ineffectiveness was insignificant for the three and six months ended June 30, 2016 and 2015. Cash flows from derivatives used to manage commodity and foreign exchange risks are classified as operating activities within the consolidated statement of cash flows.

Net Investment Hedges

The Company is also exposed to the risk that adverse changes in foreign currency exchange rates could impact its net investment in non-U.S. subsidiaries. To manage this risk, the Company designates certain qualifying derivative and non-derivative instruments, including foreign currency forward contracts and foreign currency-denominated debt, as net investment hedges of certain non-U.S. subsidiaries. The effective portion of the gains or losses on instruments designated as net investment hedges are recognized within OCI to offset changes in the value of the net investment in these foreign currency-denominated operations. Any ineffective portion of gains or losses on net investment hedges are reclassified to other income (expense), net within the consolidated statement of operations. Gains and losses reported in accumulated other comprehensive income (loss) are reclassified to earnings only when the related currency translation adjustments are required to be reclassified, usually upon sale or liquidation of the investment. Cash flows from derivatives designated as net investment hedges are classified as investing activities within the consolidated statement of cash flows.

During the first quarter of 2016, the Company entered into a forward contract with a notional amount of 2.4 billion Chinese Yuan Renminbi ("RMB") (approximately $370 million, using March 31, 2016 foreign currency rates) that was designated as a net investment hedge of the foreign currency exposure of its investments in certain RMB-denominated wholly-owned subsidiaries. This forward contract matured in May 2016, and the Company paid $1 million at settlement. During the second quarter of 2016, the Company entered into forward contracts with notional amounts totaling 2.4 billion RMB (approximately $355 million, using June 30, 2016 foreign currency rates) that were designated as net investment hedges of the foreign currency exposure of its investments in certain RMB-denominated wholly-owned subsidiaries. These contracts mature in November 2016. Refer to the tables below for details of the fair value recorded in the consolidated balance sheet and the effects recorded in the consolidated statement of operations and consolidated statement of comprehensive income related to these derivative instruments.

The Company has designated the €700 million 2015 Euro-denominated Senior Notes, as more fully described in Note 8. Debt, as a net investment hedge of the foreign currency exposure of its investments in certain Euro-denominated wholly-owned subsidiaries. Due to changes in the value of the Euro-denominated debt designated as a net investment hedge, during the three and six months ended June 30, 2016, $16 million and $(9) million, respectively, of gains (losses) were recognized within the cumulative translation adjustment component of OCI. During the three and six months ended June 30, 2015, $19 million and $21 million, respectively, of losses were recognized within the cumulative translation adjustment component of OCI related to this net investment hedge. Cumulative losses included in accumulated OCI on this net investment hedge were $15 million as of June 30, 2016 and $5 million as of December 31, 2015, which were due to the strengthening of the Euro relative to the U.S. dollar over the term of this arrangement. There were no amounts reclassified or recognized for ineffectiveness during the three and six months ended June 30, 2016 or 2015.

Derivatives Not Designated as Hedges

The Company enters into certain foreign currency and commodity contracts that are not designated as hedges. When hedge accounting is not applied to derivative contracts, gains and losses are recorded to other income (expense), net and cost of sales in the consolidated statement of operations.

As more fully disclosed in Note 17. Acquisitions and Divestitures, on July 30, 2015, Delphi made a recommended offer to acquire HellermannTyton. In conjunction with the proposed acquisition, in August 2015, the Company entered into option contracts with notional amounts totaling £917 million to hedge portions of the currency risk associated with the cash payment for the proposed acquisition at a cost of $15 million. Subsequently, in conjunction with the closing of the acquisition, Delphi entered into offsetting option contracts. Pursuant to the requirements of ASC 815, Derivatives and Hedging, the options did not qualify as hedges for accounting purposes. The Company paid $15 million to settle these options during the six months ended June 2016, which is reflected within investing activities in the consolidated statement of cash flows.

Fair Value of Derivative Instruments in the Balance Sheet

The fair value of derivative financial instruments recorded in the consolidated balance sheets as of June 30, 2016 and December 31, 2015 are as follows:



	Asset Derivatives			Liability Derivatives			Net Amounts of Assets and (Liabilities) Presented in the Balance Sheet
	Balance Sheet Location	June 30, 2016		Balance Sheet Location	June 30, 2016		June 30, 2016

	(in millions)
Derivatives designated as cash flow hedges:
Commodity derivatives	Other current assets	$	—	Accrued liabilities	$	19
Foreign currency derivatives*	Accrued liabilities	4		Accrued liabilities	54		(50	)
Commodity derivatives	Other long-term assets	—		Other long-term liabilities	1
Foreign currency derivatives*	Other long-term assets	2		Other long-term assets	—		2
Foreign currency derivatives*	Other long-term liabilities	1		Other long-term liabilities	6		(5	)
Derivatives designated as net investment hedges:
Foreign currency derivatives	Other current assets	$	4	Accrued liabilities	$	—
Total derivatives designated as hedges		$	11		$	80

Derivatives not designated:
Commodity derivatives	Other current assets	$	—	Accrued liabilities	$	1
Foreign currency derivatives*	Accrued liabilities	2		Accrued liabilities	3		(1	)
Total derivatives not designated as hedges		$	2		$	4



	Asset Derivatives			Liability Derivatives			Net Amounts of Assets and (Liabilities) Presented in the Balance Sheet
	Balance Sheet Location	December 31, 2015		Balance Sheet Location	December 31, 2015		December 31, 2015

	(in millions)
Derivatives designated as cash flow hedges:
Commodity derivatives	Other current assets	$	—	Accrued liabilities	$	39
Foreign currency derivatives*	Accrued liabilities	3		Accrued liabilities	69		$	(66	)
Commodity derivatives	Other long-term assets	—		Other long-term liabilities	10
Foreign currency derivatives*	Other long-term liabilities	1		Other long-term liabilities	12		(11		)
Total derivatives designated as hedges		$	4		$	130

Derivatives not designated:
Commodity derivatives	Other current assets	$	—	Accrued liabilities	$	2
Foreign currency derivatives*	Accrued liabilities	2		Accrued liabilities	3		(1		)
Foreign currency derivatives*	Other long-term liabilities	1		Other long-term liabilities	1		—
Total derivatives not designated as hedges		$	3		$	6

* Derivative instruments within this category are subject to master netting arrangements and are presented on a net basis in the consolidated balance sheets in accordance with accounting guidance related to the offsetting of amounts related to certain contracts.

The fair value of Delphi’s derivative financial instruments was in a net liability position as of June 30, 2016 and December 31, 2015.

Effect of Derivatives on the Statement of Operations and Statement of Comprehensive Income

The pre-tax effect of derivative financial instruments in the consolidated statement of operations and consolidated statement of comprehensive income for the three months ended June 30, 2016 is as follows:



Three Months Ended June 30, 2016	Gain (loss) Recognized in OCI (Effective Portion)			Loss Reclassified from OCI into Income (Effective Portion)			Gain Recognized in Income (Ineffective Portion Excluded from Effectiveness Testing)

	(in millions)
Derivatives designated as cash flow hedges:
Commodity derivatives	$	1		$	(11	)	$	—
Foreign currency derivatives	(14		)	(21		)	—
Derivatives designated as net investment hedges:
Foreign currency derivatives	9			—			—
Total	$	(4	)	$	(32	)	$	—



	Loss Recognized in Income

	(in millions)
Derivatives not designated:
Commodity derivatives	$	—
Foreign currency derivatives	—
Total	$	—



Three Months Ended June 30, 2015	Loss Recognized in OCI (Effective Portion)			Loss Reclassified from OCI into Income (Effective Portion)			Gain Recognized in Income (Ineffective Portion Excluded from Effectiveness Testing)

	(in millions)
Derivatives designated as cash flow hedges:
Commodity derivatives	$	(11	)	$	(8	)	$	—
Foreign currency derivatives	(21		)	(18		)	—
Total	$	(32	)	$	(26	)	$	—



	Loss Recognized in Income

	(in millions)
Derivatives not designated:
Commodity derivatives	$	(3	)
Foreign currency derivatives	(4		)
Total	$	(7	)

The pre-tax effect of derivative financial instruments in the consolidated statement of operations and consolidated statement of comprehensive income for the six months ended June 30, 2016 is as follows:



Six Months Ended June 30, 2016	Gain (loss) Recognized in OCI (Effective Portion)			Loss Reclassified from OCI into Income (Effective Portion)			Gain Recognized in Income (Ineffective Portion Excluded from Effectiveness Testing)

	(in millions)
Derivatives designated as cash flow hedges:
Commodity derivatives	$	4		$	(25	)	$	—
Foreign currency derivatives	(20		)	(45		)	—
Derivatives designated as net investment hedges:
Foreign currency derivatives	4			—			—
Total	$	(12	)	$	(70	)	$	—



	Loss Recognized in Income

	(in millions)
Derivatives not designated:
Commodity derivatives	$	—
Foreign currency derivatives	(2		)
Total	$	(2	)



Six Months Ended June 30, 2015	Loss Recognized in OCI (Effective Portion)			Loss Reclassified from OCI into Income (Effective Portion)			Gain Recognized in Income (Ineffective Portion Excluded from Effectiveness Testing)

	(in millions)
Derivatives designated as cash flow hedges:
Commodity derivatives	$	(25	)	$	(18	)	$	—
Foreign currency derivatives	(39		)	(32		)	—
Total	$	(64	)	$	(50	)	$	—



	Loss Recognized in Income

	(in millions)
Derivatives not designated:
Commodity derivatives	$	(3	)
Foreign currency derivatives	(5		)
Total	$	(8	)

The gain or loss reclassified from OCI into income for the effective portion of designated derivative instruments and the gain or loss recognized in income for the ineffective portion of designated derivative instruments excluded from effectiveness testing were recorded to other income, net and cost of sales in the consolidated statements of operations for the three and six months ended June 30, 2016 and 2015. The gain or loss recognized in income for non-designated derivative instruments was recorded in other income (expense), net and cost of sales for the three and six months ended June 30, 2016 and 2015.