Kodak, as a result of its global operating and financing activities, is exposed to changes in foreign currency exchange rates and interest rates, which may adversely affect its results of operations and financial position. Kodak manages such exposures, in part, with derivative financial instruments. Foreign currency forward contracts are used to mitigate currency risk related to foreign currency denominated assets and liabilities, as well as forecasted foreign currency denominated intercompany assets. Kodak’s exposure to changes in interest rates results from its investing and borrowing activities used to meet its liquidity needs. Kodak does not utilize financial instruments for trading or other speculative purposes.

Kodak’s foreign currency forward contracts are not designated as hedges and are marked to market through net (loss) earnings at the same time that the exposed assets and liabilities are re-measured through net (loss) earnings (both in Other charges, net in the Consolidated Statement of Operations). The notional amount of such contracts open at December 31, 2020 and 2019 was approximately $361 million and $332 million, respectively. The majority of the contracts of this type held by Kodak at December 31, 2020 and 2019 were denominated in euros, Japanese yen, Chinese renminbi and Swiss francs. The net effect of foreign currency forward contracts in the results of operations is shown in the following table:

Year Ended December 31,

(in millions)

2020

2019

Net (gain) loss from derivatives not designated as hedging

instruments

(11

)

Kodak had no derivatives designated as hedging instruments for the years ended December 31, 2020 and 2019.

Kodak’s derivative counterparties are high-quality investment or commercial banks with significant experience with such instruments. Kodak manages exposure to counterparty credit risk by requiring specific minimum credit standards and diversification of counterparties. Kodak has procedures to monitor the credit exposure amounts. The maximum credit exposure at December 31, 2020 was not significant to Kodak.

In the event of a default under the Company’s ABL Credit Agreement, or a default under any derivative contract or similar obligation of Kodak, subject to certain minimum thresholds, the derivative counterparties would have the right, although not the obligation, to require immediate settlement of some or all open derivative contracts at their then-current fair value, but with liability positions netted against asset positions with the same counterparty.

As discussed in Note 9, “Debt and Finance Leases”, the Company concluded that the Convertible Notes were considered more akin to a debt-type instrument and that the economic characteristics and risks of the embedded conversion features and term extension option were not considered clearly and closely related to the Convertible Notes. The embedded conversion features not considered clearly and closely related are the conversion at the option of the holder (“Optional Conversion”) and the conversion in the event of a fundamental change or reorganization (“Fundamental Change or Reorganization Conversion”). Accordingly, these embedded conversion features and term extension option were bifurcated from the Convertible Notes and separately accounted for on a combined basis as a single derivative asset or liability. The embedded conversion features and term extension option were revalued as of August 3, 2020, when the Initial Conversion Shares were issued, resulting in the recognition of $407 million of expense for a pro-rata portion of the embedded conversion features and term extension option. The remaining embedded conversion features and term extension option were revalued again as of the Mandatory Conversion date, resulting in the recognition of $9 million of net expense.

With the conversion of the Convertible Notes in the third quarter of 2020, the embedded conversion features and term extension option expired. The derivative was in a liability position at December 31, 2019 and was reported in Other long-term liabilities in the Consolidated Statement of Financial Position. The derivative was being accounted for at fair value with changes in fair value reported in Other charges, net in the Consolidated Statement of Operations.

As discussed in Note 10, “Redeemable, Convertible, Series A Preferred Stock”, Kodak concluded that the Series A Preferred Stock is considered more akin to a debt-type instrument and that the economic characteristics and risks of the embedded conversion features, except where the conversion price was increased to the liquidation preference, were not considered clearly and closely related to the Series A Preferred Stock. The embedded conversion features not considered clearly and closely related are the conversion at the option of the holder; the ability of Kodak to automatically convert the stock after the second anniversary of issuance and the conversion in the event of a fundamental change or reorganization. Accordingly, these embedded conversion features were bifurcated from the Series A Preferred Stock and separately accounted for on a combined basis as a single derivative liability which is reported in Other current liabilities in the Consolidated Statement of Financial Position as of December 31, 2020 and in Other long-term liabilities as of December 31, 2019. The derivative is being accounted for at fair value with changes in fair value being reported in Other charges, net in the Consolidated Statement of Operations.

Fair values of Kodak’s foreign currency forward contracts are determined using observable inputs (Level 2 fair value measurements) and are based on the present value of expected future cash flows (an income approach valuation technique) considering the risks involved and using discount rates appropriate for the duration of the contracts. The gross fair value of foreign currency forward contracts in an asset position are reported in Other current assets in the Consolidated Statement of Financial Position and the gross fair value of foreign currency contracts in a liability position are reported in Other current liabilities. The gross fair value of foreign currency forward contracts in an asset position as of December 31, 2020 and 2019 was $1 million in both periods. The gross fair value of the foreign currency forward contracts in a liability position as of December 31, 2020 and 2019 was $0 million in both periods.

The fair value of the embedded conversion features and term extension option for the Convertible Notes were revalued as of August 3, 2020, and again at September 30, 2020. The fair value of the embedded derivative at each conversion date was calculated based on the fair value of the shares issued less the fair value of debt. The fair value of shares issued is based on the weighted average stock price on the time of day the shares were transferred for August 3, 2020, and the closing stock price as of September 30, 2020. The fair value of debt is based on pricing models based on the value of related cash flows discounted at current market interest rates.

The following table presents the key inputs in the determination of fair value for the embedded conversion features and termination option derivatives at each conversion date:

	Valuation Date
	September 30,			August 3,
	2020			2020
Total value of embedded derivative liability immediately prior to extinguishment (in millions)	$	9		$	429
Value of embedded derivative liability that expired (in millions)	$	9		$	416
Value of remaining embedded derivative liability	$	—		$	13
Kodak's stock price ⁽¹⁾	$	8.82		$	16.91
Risk free rate		0.12	%		0.12	%
Yield on the Convertible Notes		8.93	%		9.47	%

⁽¹⁾

The closing stock price was used for the September 30, 2020 valuation. The weighted average stock price based on the time of day the shares were transferred was used for the August 3, 2020 valuation.

Except as discussed above for the fair value determined at the time of conversion, the fair value of the embedded conversion features and term extension option derivatives are calculated using unobservable inputs (Level 3 fair measurements). The value of the Optional Conversion feature associated with both the Convertible Notes and Series A Preferred Stock is calculated using a binomial lattice model. The value of the term extension option reflects the probability weighted average value of the Convertible Notes using the original maturity date and a hypothetical extended maturity date, with all other contractual terms unchanged. The following tables present the key inputs in the determination of fair value for the embedded conversion features and termination option derivatives.

	Valuation Date
	December 31,
	2019
Total value of embedded derivative liability (in millions)	$	51
Kodak's closing stock price		4.65
Expected stock price volatility		104.61	%
Risk free rate		1.58	%
Yield on the Convertible Notes		11.52	%

Series A Preferred Stock:

	Valuation Date
	December 31,
	2020			2019
Total value of embedded derivative liability (in millions)	$	9		$	1
Kodak's closing stock price		8.14			4.65
Expected stock price volatility		133.44	%		104.61	%
Risk free rate		0.10	%		1.58	%
Yield on the preferred stock		11.97	%		16.27	%

The Fundamental Change and Reorganization Conversion values at issuance were calculated as the difference between the total value of the Convertible Notes or Series A Preferred Stock, as applicable, and the sum of the net present value of the cash flows if the Convertible Notes are repaid at their maturity or the Series A Preferred Stock is redeemed on its fifth anniversary and the values of the other embedded derivatives. The Fundamental Change and Reorganization Conversion value reduces the value of the embedded conversion features and term extension option derivative liability. Other than events which alter the likelihood of a fundamental change or reorganization event, the value of the Fundamental Change and Reorganization Conversion reflect the value as of the issuance date, amortized for the passage of time.

The fair values of long-term borrowings were $17 million and $111 million at December 31, 2020 and 2019, respectively.

Fair values of long-term borrowings (Level 2 fair value measurements) are determined by reference to quoted market prices, if available, or by pricing models based on the value of related cash flows discounted at current market interest rates.

Transfers between levels of the fair value hierarchy are recognized based on the actual date of the event or change in circumstances that caused the transfer. There were no transfers between levels of the fair value hierarchy during the year ended December 31, 2020.

The carrying values of cash and cash equivalents, restricted cash and the current portion of long-term borrowings approximate their fair values.