Derivative and Hedging Instruments

12 Months Ended

Dec. 31, 2020

Foreign Currency Derivatives [Abstract]

Derivative and Hedging Instruments

The Company monitors and manages its foreign currency and interest rate exposures as part of its overall risk management program which focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.  A primary objective of the Company’s risk management strategies is to reduce the financial impact that may arise from volatility in foreign currency exchange rates principally through the use of both foreign exchange derivative contracts (Derivatives) and foreign currency denominated debt (Net Investment Hedge). In addition, the Company may enter into interest rate derivative contracts to manage the effects of interest rate movements on the Company’s aggregate liability portfolio, including potential future debt issuances (Cash Flow Hedges).

Foreign Exchange Risk

Derivatives

The Company enters into foreign exchange derivative contracts to manage currency exposure associated with anticipated receipts and disbursements which are valued based on currencies other than the functional currency of the entity. The Company may also enter into foreign exchange derivative contracts to offset possible changes in value due to foreign exchange fluctuations of assets and liabilities. In addition, the Company is subject to foreign exchange risk as part of its daily settlement activities. This risk is typically limited to a few days between when a payment transaction takes place and the subsequent settlement with customers. To manage this risk, the Company enters into short duration foreign exchange derivative contracts based upon anticipated receipts and disbursements for the respective currency position. The objective of these activities is to reduce the Company’s exposure to gains and losses resulting from fluctuations of foreign currencies against its functional currencies.

The Company’s derivative contracts are summarized below:

	December 31, 2020				December 31, 2019
	Notional		Fair Value		Notional		Fair Value
	(in millions)
Commitments to purchase foreign currency	$	389	$	17	$	185	$	3
Commitments to sell foreign currency	1,110		(26)		1,506		(25)
Options to sell foreign currency	—		—		21		2
Balance sheet location
Prepaid expenses and other current assets 1			$	19			$	12
Other current liabilities 1			(28)				(32)

1The derivative contracts are subject to enforceable master netting arrangements, which contain various netting and setoff provisions.

The amount of gain (loss) recognized on the consolidated statement of operations for the contracts to purchase and sell foreign currency is summarized below:

	Year Ended December 31,
	2020		2019		2018
	(in millions)
Foreign exchange derivative contracts
General and administrative	$	40	$	(39)	$	53

The fair value of the foreign exchange derivative contracts generally reflects the estimated amounts that the Company would receive (or pay), on a pre-tax basis, to terminate the contracts. The terms of the foreign exchange derivative contracts are generally less than 18 months. The Company had no deferred gains or losses related to foreign exchange contracts in accumulated other comprehensive income as of December 31, 2020 and 2019, as these contracts were not designated as hedging instruments for accounting.

The Company’s derivative financial instruments are subject to both market and counterparty credit risk. Market risk is the potential for economic losses to be incurred on market risk sensitive instruments arising from adverse changes in market factors such as

foreign currency exchange rates, interest rates and other related variables. Counterparty credit risk is the risk of loss due to failure of the counterparty to perform its obligations in accordance with contractual terms. To mitigate counterparty credit risk, the Company enters into derivative contracts with a diversified group of selected financial institutions based upon their credit ratings and other factors. Generally, the Company does not obtain collateral related to derivatives because of the high credit ratings of the counterparties.

Net Investment Hedge

The Company uses foreign currency denominated debt to hedge a portion of its net investment in foreign operations against adverse movements in exchange rates, with changes in the value of the debt recorded within currency translation adjustment in accumulated other comprehensive income (loss). In 2015, the Company designated its €1.65 billion euro-denominated debt as a net investment hedge for a portion of its net investment in European operations. As of December 31, 2020, the Company had a net foreign currency transaction loss of $175 million after tax, in accumulated other comprehensive income (loss) associated with hedging activity.

Interest Rate Risk

Cash Flow Hedges

During the fourth quarter of 2019, the Company entered into treasury rate locks for a total notional amount of $1 billion, which were accounted for as cash flow hedges. These contracts were entered into to hedge a portion of the Company’s interest rate exposure attributable to changes in the treasury rates related to the forecasted debt issuance during 2020. The maximum length of time over which the Company had hedged its exposure was 30 years. In connection with the issuance of the 2020 USD Notes, these contracts were settled and the Company paid $175 million. As of December 31, 2020, a cumulative loss of $133 million, after tax, was recorded in accumulated other comprehensive income (loss) associated with these contracts and will be reclassified as an adjustment to interest expense over the respective terms of the 2020 USD Notes. As of December 31, 2019, the Company recorded a pre-tax net unrealized gain of $14 million ($11 million, after tax) in accumulated other comprehensive income (loss) associated with these contracts.

In 2020, the Company reclassified $4 million, pre-tax, of the deferred loss on cash flow derivative contracts recorded in accumulated other comprehensive income (loss) to interest expense on the statement of operations. The Company estimates that $6 million, pre-tax, of the deferred loss will be reclassified into interest expense within the next 12 months.