(10) It is the Company’s policy that derivative transactions are executed only to manage exposures arising in the normal course of business and not for the purpose of creating speculative positions or trading. The Company manages the relationship of the types and amounts of its funding sources to its Receivable and Lease portfolios in an effort to diminish risk due to interest rate and foreign currency fluctuations, while responding to favorable financing opportunities. The Company also has foreign currency exposures at some of its foreign and domestic operations related to financing in currencies other than the functional currencies.

All derivatives are recorded at fair value on the balance sheet. Cash collateral received or paid is not offset against the derivative fair values on the balance sheet. Each derivative is designated as a cash flow hedge, a fair value hedge, or remains undesignated. All designated hedges are formally documented as to the relationship with the hedged item as well as the risk-management strategy. Both at inception and on an ongoing basis the hedging instrument is assessed as to its effectiveness. If and when a derivative is determined not to be highly effective as a hedge, or the underlying hedged transaction is no longer likely to occur, or the hedge designation is removed, or the derivative is terminated, hedge accounting is discontinued. Any past or future changes in the derivative’s fair value, which will not be effective as an offset to the income effects of the item being hedged, are recognized currently in the income statement.

Cash flow hedges

Certain interest rate contracts (swaps) were designated as hedges of future cash flows from borrowings. The total notional amounts of the receive-variable/pay-fixed interest rate contracts at July 29, 2018, October 29, 2017, and July 30, 2017 were $2,400.0 million, $1,700.0 million, and $1,700.0 million, respectively. The effective portions of the fair value gains or losses on these cash flow hedges were recorded in OCI and subsequently reclassified into interest expense in the same periods during which the hedged transactions affected earnings. These amounts offset the effects of interest rate changes on the related borrowings. Any ineffective portions of the gains or losses on all cash flow interest rate contracts designated as cash flow hedges were recognized currently in interest expense and were not material during any periods presented. The cash flows from these contracts were recorded in operating activities in the statement of consolidated cash flows.

The amount of gain recorded in OCI at July 29, 2018 that is expected to be reclassified to interest expense in the next twelve months if interest rates remain unchanged is approximately $9.4 million after-tax. These contracts mature in up to 23 months. There were no gains or losses reclassified from OCI to earnings based on the probability that the original forecasted transaction would not occur.

Fair value hedges

Certain interest rate contracts (swaps) were designated as fair value hedges of borrowings. The total notional amounts of these receive-fixed/pay-variable interest rate contracts at July 29, 2018, October 29, 2017, and July 30, 2017 were $7,562.2 million, $8,077.2 million, and $7,118.1 million, respectively. The effective portions of the fair value gains or losses on these contracts were offset by fair value gains or losses on the hedged items (fixed-rate borrowings). Any ineffective portions of the gains or losses were recognized currently in interest expense. The ineffective portions were a loss of $.4 million and a gain of $1.1 million during the third quarter of 2018 and 2017, respectively, and a loss of $3.7 million and a gain of $3.2 million during the first nine months of 2018 and 2017, respectively. The cash flows from these contracts were recorded in operating activities in the statement of consolidated cash flows.

The gains (losses) on these contracts and the underlying borrowings recorded in interest expense were as follows (in millions of dollars):


	Three Months Ended				Nine Months Ended
	July 29		July 30		July 29		July 30
	2018		2017		2018		2017
Interest rate contracts *	$	(8.0)	$	9.9	$	(277.5)	$	(188.0)
Borrowings **		7.6		(8.8)		273.8		191.2

* Includes changes in fair values of interest rate contracts excluding net accrued interest expense of $2.2 million and net accrued interest income of $15.4 million during the third quarter of 2018 and 2017, respectively, and net accrued interest income of $14.9 million and $61.6 million during the first nine months of 2018 and 2017, respectively.

** Includes adjustments for fair values of hedged borrowings excluding accrued interest expense of $58.0 million and $52.5 million during the third quarter of 2018 and 2017, respectively, and $180.0 million and $171.9 million during the first nine months of 2018 and 2017, respectively.

Derivatives not designated as hedging instruments

The Company has certain interest rate contracts (swaps and caps), foreign exchange contracts (forwards and swaps), and cross-currency interest rate contracts (swaps), which were not formally designated as hedges. These derivatives were held as economic hedges for underlying interest rate or foreign currency exposures primarily for certain borrowings. The total notional amounts of these interest rate swaps at July 29, 2018, October 29, 2017, and July 30, 2017 were $1,766.2 million, $2,311.3 million, and $2,219.5 million, the foreign exchange contracts were $2,144.1 million, $1,455.9 million, and $1,614.9 million, and the cross‑currency interest rate contracts were $86.1 million, $65.8 million, and $79.7 million, respectively. At July 29, 2018, October 29, 2017, and July 30, 2017 there were also $1,715.2 million, $1,594.3 million, and $1,790.6 million, respectively, of interest rate caps purchased and the same amounts sold at the same capped interest rate to facilitate borrowings through securitization of retail notes. The fair value gains or losses from the interest rate contracts were recognized currently in interest expense and the gains or losses from foreign exchange contracts in administrative and operating expenses, generally offsetting over time the expenses on the exposures being hedged. The cash flows from these non-designated contracts were recorded in operating activities in the statement of consolidated cash flows.

Fair values of derivative instruments in the consolidated balance sheet were as follows (in millions of dollars):


	July 29		October 29		July 30
	2018		2017		2017
Receivables from John Deere
Designated as hedging instruments:
Interest rate contracts	$	23.7	$	64.8	$	89.9

Not designated as hedging instruments:
Interest rate contracts		29.6		20.6		18.9
Cross-currency interest rate contracts		2.4		5.6		3.9
Total not designated		32.0		26.2		22.8

Other Assets
Designated as hedging instruments:
Interest rate contracts				7.0		12.7

Not designated as hedging instruments:
Interest rate contracts		.7		1.1		1.3
Foreign exchange contracts		11.2		24.6		2.0
Total not designated		11.9		25.7		3.3

Total derivative assets	$	67.6	$	123.7	$	128.7

Other Payables to John Deere
Designated as hedging instruments:
Interest rate contracts	$	299.6	$	107.2	$	58.8

Not designated as hedging instruments:
Interest rate contracts		29.9		18.4		17.2
Cross-currency interest rate contracts		1.6		.9		3.8
Total not designated		31.5		19.3		21.0

Accounts Payable and Accrued Expenses
Not designated as hedging instruments:
Foreign exchange contracts		5.6		6.0		35.1
Total not designated		5.6		6.0		35.1

Total derivative liabilities	$	336.7	$	132.5	$	114.9

The classification and gains (losses), including accrued interest expense related to derivative instruments on the statement of consolidated income consisted of the following (in millions of dollars):


		Three Months Ended				Nine Months Ended
	Expense or OCI	July 29		July 30		July 29		July 30
	Classification	2018		2017		2018		2017
Fair Value Hedges
Interest rate contracts	Interest expense	$	(10.2)	$	25.3	$	(262.6)	$	(126.4)

Cash Flow Hedges
Recognized in OCI
(Effective Portion):
Interest rate contracts	OCI (pretax) *		1.4		(.9)		16.1		1.6

Reclassified from OCI
(Effective Portion):
Interest rate contracts	Interest expense *		2.5		(.3)		3.4		(.9)

Recognized Directly in Income
(Ineffective Portion)			**		**		**		**

Not Designated as Hedges
Interest rate contracts	Interest expense *	$	(1.9)	$	.5	$	(3.7)	$	(1.1)
Foreign exchange contracts	Administrative and operating expenses *		58.2		(98.6)		26.8		(125.4)
Total not designated		$	56.3	$	(98.1)	$	23.1	$	(126.5)

* Includes interest and foreign exchange gains (losses) from cross-currency interest rate contracts.

** The amounts were not significant.

Included in the table above are interest expense and administrative and operating expense amounts the Company incurred on derivatives transacted with John Deere. The amount the Company recognized on these affiliate party transactions for the three months ended July 29, 2018 and July 30, 2017 were a loss of $10.3 million and a gain of $20.0 million, respectively. The amount the Company recognized on these affiliate party transactions for the nine months ended July 29, 2018 and July 30, 2017 were losses of $265.0 million and $133.2 million, respectively.

Counterparty Risk and Collateral

The Company’s outstanding derivatives have been transacted with both unrelated external counterparties and with John Deere. For derivatives transacted with John Deere, the Company utilizes a centralized hedging structure in which John Deere enters into a derivative transaction with an unrelated external counterparty and simultaneously enters into a derivative transaction with the Company. Except for collateral provisions, the terms of the transaction between the Company and John Deere are identical to the terms of the transaction between John Deere and its unrelated external counterparty.

Certain of the Company’s derivative agreements executed directly with the unrelated external counterparties contain credit support provisions that may require the Company to post collateral based on the size of the net liability positions and credit ratings. At July 29, 2018, October 29, 2017, and July 30, 2017, there were no aggregate liability positions for derivatives with credit-risk-related contingent features. If the credit‑risk‑related contingent features were triggered, the Company would be required to post collateral up to an amount equal to any liability position, prior to considering applicable netting provisions.

Derivative instruments are subject to significant concentrations of credit risk to the banking sector. The Company manages individual unrelated external counterparty exposure by setting limits that consider the credit rating of the unrelated external counterparty, the credit default swap spread of the counterparty, and other financial commitments and exposures between the Company and the unrelated external counterparty banks. All interest rate derivatives are transacted under International Swaps and Derivatives Association (ISDA) documentation. Each master agreement executed with an unrelated external counterparty permits the net settlement of amounts owed in the event of default or termination.

The Company also has ISDA agreements with John Deere that permit the net settlement of amounts owed between counterparties in the event of early termination. In addition, the Company has a loss sharing agreement with John Deere in which it has agreed to absorb any losses and expenses John Deere incurs if an unrelated external counterparty fails to meet its obligations on a derivative transaction that John Deere entered into to manage exposures of the Company. The loss sharing agreement does not increase the maximum amount of loss that the Company would incur, after considering collateral received and netting arrangements, as of July 29, 2018. The loss sharing agreement increased the maximum amount of loss that the Company would incur, after considering collateral received and netting arrangements, by $23.5 million and $41.3 million as of October 29, 2017 and July 30, 2017, respectively.

Derivatives are recorded without offsetting for netting arrangements or collateral. The impact on the derivative assets and liabilities for external derivatives and those with John Deere related to netting arrangements and any collateral received or paid were as follows (in millions of dollars):


July 29, 2018
Derivatives:	Gross Amounts Recognized		Netting Arrangements		Cash Collateral Received/Paid	Net Amount
Assets
External	$	11.9	$	(1.3)		$	10.6
John Deere		55.7		(24.4)			31.3
Liabilities
External		5.6		(1.3)			4.3
John Deere		331.1		(24.4)			306.7


October 29, 2017
Derivatives:	Gross Amounts Recognized		Netting Arrangements		Cash Collateral Received/Paid	Net Amount
Assets
External	$	32.7	$	(.1)		$	32.6
John Deere		91.0		(65.9)			25.1
Liabilities
External		6.0		(.1)			5.9
John Deere		126.5		(65.9)			60.6


July 30, 2017
Derivatives:	Gross Amounts Recognized		Netting Arrangements		Cash Collateral Received/Paid	Net Amount
Assets
External	$	16.0	$	(.8)		$	15.2
John Deere		112.7		(79.8)			32.9
Liabilities
External		35.1		(.8)			34.3
John Deere		79.8		(79.8)