Derivative Instruments

9 Months Ended

Jun. 30, 2012

Derivative Instruments

13. Derivative Instruments

The Company manages its exposure to various risks of its ongoing business operations according to a risk management policy. The primary risks managed with derivative instruments are interest rate risk and foreign exchange risk.

The following tables summarize the gross fair value of the Company’s derivative positions as of June 30, 2012 and October 1, 2011:

	As of June 30, 2012
	Current Assets			Other Assets			Other Accrued Liabilities			Other Long- Term Liabilities
Derivatives designated as hedges
Foreign exchange	$	178		$	78		$	(58	)	$	(33	)
Interest rate		—			224			—			—
Other		—			—			(3	)		—
Derivatives not designated as hedges
Foreign exchange		69			194			(38	)		—
Gross fair value of derivatives		247			496			(99	)		(33	)
Counterparty netting		(87	)		(24	)		87			24
Total Derivatives (1)	$	160		$	472		$	(12	)	$	(9	)

	As of October 1, 2011
	Current Assets			Other Assets			Other Accrued Liabilities			Other Long- Term Liabilities
Derivatives designated as hedges
Foreign exchange	$	133		$	33		$	(100	)	$	(90	)
Interest rate		1			213			—			—
Other		—			—			(1	)		—
Derivatives not designated as hedges
Foreign exchange		103			229			(51	)		(21	)
Interest rate		—			—			—			(18	)
Gross fair value of derivatives		237			475			(152	)		(129	)
Counterparty netting		(111	)		(56	)		111			56
Total Derivatives (1)	$	126		$	419		$	(41	)	$	(73	)

⁽¹⁾  Refer to Note 12 for further information on derivative fair values and counterparty netting.

Interest Rate Risk Management

The Company is exposed to the impact of interest rate changes primarily through its borrowing activities. The Company’s objective is to mitigate the impact of interest rate changes on earnings and cash flows and on the market value of its borrowings. In accordance with its policy, the Company targets its fixed-rate debt as a percentage of its net debt between a minimum and maximum percentage. The Company typically uses pay-floating and pay-fixed interest rate swaps to facilitate its interest rate management activities.

The Company designates pay-floating interest rate swaps as fair value hedges of fixed-rate borrowings effectively converting fixed-rate borrowings to variable rate borrowings indexed to LIBOR. As of June 30, 2012 and October 1, 2011, the total notional amount of the Company’s pay-floating interest rate swaps was $3.1 billion and $1.2 billion, respectively. The following table summarizes adjustments related to fair value hedges included in net interest expense in the Condensed Consolidated Statements of Income.

	Quarter Ended						Nine Months Ended
	June 30, 2012			July 2, 2011			June 30, 2012			July 2, 2011
Gain (loss) on interest rate swaps	$	25		$	16		$	9		$	(61	)
Gain (loss) on hedged borrowings		(25	)		(16	)		(9	)		61

The Company may designate pay-fixed interest rate swaps as cash flow hedges of interest payments on floating-rate borrowings. Pay-fixed swaps effectively convert floating-rate borrowings to fixed-rate borrowings. The unrealized gain or losses from these cash flow hedges are deferred in accumulated other comprehensive income (AOCI) and recognized in interest expense as the interest payments occur. The Company did not have pay-fixed interest rate swaps that were designated as cash flow hedges of interest payments at June 30, 2012 nor at October 1, 2011.

Foreign Exchange Risk Management

The Company transacts business globally and is subject to risks associated with changing foreign currency exchange rates. The Company’s objective is to reduce earnings and cash flow fluctuations associated with foreign currency exchange rate changes, enabling management to focus on core business issues and challenges.

The Company enters into option and forward contracts that change in value as foreign currency exchange rates change to protect the value of its existing foreign currency assets, liabilities, firm commitments and forecasted but not firmly committed foreign currency transactions. In accordance with policy, the Company hedges its forecasted foreign currency transactions for periods generally not to exceed four years within an established minimum and maximum range of annual exposure. The gains and losses on these contracts offset changes in the U.S. dollar equivalent value of the related forecasted transaction, asset, liability or firm commitment. The principal currencies hedged are the Euro, Japanese yen, Canadian dollar and British pound. Cross-currency swaps are used to effectively convert foreign currency-denominated borrowings into U.S. dollar denominated borrowings.

The Company designates foreign exchange forward and option contracts as cash flow hedges of firmly committed and forecasted foreign currency transactions. As of June 30, 2012 and October 1, 2011, the notional amounts of the Company’s net foreign exchange cash flow hedges were $5.2 billion and $3.6 billion, respectively. Mark to market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of the foreign currency transactions. Gains and losses recognized related to ineffectiveness for the nine months ended June 30, 2012 and July 2, 2011 were not material. Net deferred gains recorded in AOCI for contracts that will mature in the next twelve months totaled $120 million. The following table summarizes the pre-tax adjustments to AOCI for foreign exchange cash flow hedges.

	Quarter Ended						Nine Months Ended
	June 30, 2012			July 2, 2011			June 30, 2012			July 2, 2011
Gain (loss) recorded in AOCI	$	157		$	(114	)	$	218		$	(249	)
Reclassification of (gains) losses from AOCI into revenues and costs and expenses		(29	)		63			(15	)		119
Net change in AOCI	$	128		$	(51	)	$	203		$	(130	)

Foreign exchange risk management contracts with respect to foreign currency assets and liabilities are not designated as hedges and do not qualify for hedge accounting. The notional amounts of these foreign exchange contracts at June 30, 2012 and October 1, 2011 were $2.8 billion and $2.6 billion, respectively. During the quarters ended June 30, 2012 and July 2, 2011, the Company recognized net gains of $130 million and net losses of $62 million, respectively, in costs and expenses on these foreign exchange contracts which offset respective net losses of $136 million and net gains of $63 million on the related economic exposures. During the nine months ended June 30, 2012 and July 2, 2011, the Company recognized net gains of $73 million and net losses of $127 million, respectively, in costs and expenses on these foreign exchange contracts which offset respective net losses of $109 million and net gains of $119 million on the related economic exposures.

Commodity Price Risk Management

The Company is subject to the volatility of commodities prices and designates certain commodity forward contracts as cash flow hedges of forecasted commodity purchases. Mark to market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of commodity purchases. The fair value of the commodity hedging contracts and related gains or losses recognized in earnings were not material at June 30, 2012 nor at October 1, 2011.

Risk Management – Other Derivatives Not Designated as Hedges

The Company enters into certain other risk management contracts that are not designated as hedges and do not qualify for hedge accounting. These contracts, which may include pay fixed interest rate swaps and certain commodity swap contracts, are intended to offset economic exposures of the Company and are carried at market value with any changes in value recorded in earnings.

At June 30, 2012, the notional amount of other risk management contracts was not material. The notional amount of these pay fixed interest rate swaps not designated as hedges at October 1, 2011 was $184 million. On June 5, 2012, the Company terminated these pay fixed interest rate swaps in connection with the repurchase of securitized vacation ownership mortgage receivables. For the nine months ended June 30, 2012 and July 2, 2011, gains and losses recognized in income on these risk management contracts were not material.

Contingent Features

The Company’s derivative financial instruments may require the Company to post collateral in the event that a net liability position with a counterparty exceeds limits defined by contract and that vary with the Company’s credit rating. If the Company’s credit ratings were to fall below investment grade, such counterparties would also have the right to terminate our derivative contracts, which could lead to a net payment to or from the Company for the aggregate net value by counterparty of our derivative contracts. The aggregate fair value of derivative instruments with credit-risk-related contingent features in a net liability position by counterparty were $21 million and $114 million on June 30, 2012 and October 1, 2011, respectively.