DERIVATIVE FINANCIAL INSTRUMENTS

Brookfield Infrastructure’s activities expose it to a variety of financial risks, including market risk (i.e. currency risk, interest rate risk, commodity risk and other price risk), credit risk and liquidity risk. Brookfield Infrastructure and its subsidiaries selectively use derivative financial instruments principally to manage these risks.

The aggregate notional amount of Brookfield Infrastructure’s derivative positions at December 31, 2017 and 2016 were as follows:



US$ MILLIONS	Note	2017		2016
Foreign exchange contracts	(a)	$	3,816	$	4,488
Interest rates swaps and other	(b)	5,013		4,416
		$	8,829	$	8,904

The following table presents the change in fair values of Brookfield Infrastructure’s derivative positions during the years ended December 31, 2017 and 2016:



US$ MILLIONS	Unrealized Gains on Derivative Financial Assets		Unrealized Losses on Derivative Financial Liabilities			Net Change During 2017			Net Change During 2016
Foreign exchange derivatives	$	—	$	(305	)	$	(305	)	$	97
Interest rate derivative	132		(69		)	63			15
	$	132	$	(374	)	$	(242	)	$	112


(a)	Foreign Exchange

Brookfield Infrastructure held the following foreign exchange contracts with notional amounts at December 31, 2017 and 2016.



	Notional Amount (U.S. Dollars)				Average Exchange Rate
US$ MILLIONS	2017		2016		2017	2016
Foreign exchange contracts
Australian dollars	$	1,214	$	2,133	0.74	0.73
British pounds	2,069		1,810		1.30	1.30
European Union euros	491		374		1.17	1.14
Brazilian reais	—		144		—	3.37
Canadian dollars	42		27		0.77	0.76
	$	3,816	$	4,488


(b)	Interest Rates

At December 31, 2017, Brookfield Infrastructure held interest rate and cross currency interest rate swap contracts having an aggregate notional amount of $4,843 million (2016: $4,261 million). Brookfield Infrastructure has inflation linked swaps with an aggregate notional amount of $170 million (2016: $155 million).

Other Information Regarding Derivative Financial Instruments

The following table presents the notional amounts underlying Brookfield Infrastructure’s derivative instruments by term to maturity as at December 31, 2017 and the comparative notional amounts at December 31, 2016, for both derivatives that are classified as fair value through profit or loss and derivatives that qualify for hedge accounting:



	2017								2016
US$ MILLIONS	< 1 year		1 to 5 years		> 5 years		Total Notional Amount		Total Notional Amount
Fair value through profit or loss
Foreign exchange derivatives	$	640	$	807	$	—	$	1,447	$	1,351
Interest rate derivatives
Interest rate and cross currency interest rate swaps	273		484		59		816		752
Inflation linked swaps	—		—		170		170		155
	$	913	$	1,291	$	229	$	2,433	$	2,258
Elected for hedge accounting
Foreign exchange derivatives	$	1,788	$	581	$	—	$	2,369	$	3,136
Interest rate derivatives
Interest rate and cross currency interest rate swaps	99		2,051		1,877		4,027		3,509
	$	1,887	$	2,632	$	1,877	$	6,396	$	6,645

The following table classifies derivatives elected for hedge accounting during the years ended December 31, 2017 and 2016 as either cash flow hedges or net investment hedges. Changes in the fair value of the effective portion of the hedges are recorded in either other comprehensive income or net income, depending on the hedge classification, whereas changes in the fair value of the ineffective portion of the hedge are recorded in net income:



	2017							2016
AS AT AND FOR THE YEARS ENDED (MILLIONS)	Notional		Effective Portion			Ineffective Portion		Notional		Effective Portion		Ineffective Portion
Cash flow hedges	$	4,027	$	15		$	—	$	3,509	$	30	$	1
Net investment hedges	2,369		(197		)	—		3,136		53		—
	$	6,396	$	(182	)	$	—	$	6,645	$	83	$	1

Our partnership settles the difference between the contracted fixed and floating rates of its interest rate swaps on a net basis. All interest rate swap contracts exchanging floating rate interest amounts for fixed rate interest amounts are designated as cash flow hedges in order to reduce our partnership’s cash flow exposure resulting from variable interest rates on borrowings. The interest rate swaps and the interest payments on the borrowings occur simultaneously and the amount accumulated in equity is reclassified to profit or loss over the period that the floating rate interest payments on borrowings affect profit or loss.