DERIVATIVE INSTRUMENTS

12 Months Ended

Oct. 31, 2011

DERIVATIVE INSTRUMENTS.

DERIVATIVE INSTRUMENTS

27. DERIVATIVE INSTRUMENTS

Certain of the company’s derivative agreements contain credit support provisions that require the company to post collateral based on reductions in credit ratings. The aggregate fair value of all derivatives with credit-risk-related contingent features that were in a liability position at October 31, 2011 and 2010 was $23 million and $16 million, respectively. The company, due to its credit rating, has not posted any collateral. If the credit-risk-related contingent features were triggered, the company would be required to post full collateral for this 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 counterparty exposure by setting limits that consider the credit rating of the counterparty and the size of other financial commitments and exposures between the company and the counterparty banks. All interest rate derivatives are transacted under International Swaps and Derivatives Association (ISDA) documentation. Some of these agreements include collateral support arrangements. Each master agreement permits the net settlement of amounts owed in the event of early termination. The maximum amount of loss that the company would incur if counterparties to derivative instruments fail to meet their obligations, not considering collateral received or netting arrangements, was $485 million and $520 million as of October 31, 2011 and 2010, respectively. The amount of collateral received at October 31, 2011 and 2010 to offset this potential maximum loss was $25 million and $85 million, respectively. The netting provisions of the agreements would reduce the maximum amount of loss the company would incur if the counterparties to derivative instruments fail to meet their obligations by an additional $59 million and $58 million as of October 31, 2011 and 2010, respectively. None of the concentrations of risk with any individual counterparty was considered significant at October 31, 2011 and 2010.

Cash Flow Hedges

Certain interest rate and cross-currency 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 October 31, 2011 and 2010 were $1,350 million and $1,060 million, respectively. The total notional amounts of the cross-currency interest rate contracts were $853 million and $849 million at October 31, 2011 and 2010, respectively. The effective portions of the fair value gains or losses on these cash flow hedges were recorded in other comprehensive income (OCI) and subsequently reclassified into interest expense or other operating expenses (foreign exchange) in the same periods during which the hedged transactions affected earnings. These amounts offset the effects of interest rate or foreign currency exchange 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 or other operating expenses (foreign exchange) and were not material during any years presented. The cash flows from these contracts were recorded in operating activities in the statement of consolidated cash flows.

The amount of loss recorded in OCI at October 31, 2011 that is expected to be reclassified to interest expense or other operating expenses in the next twelve months if interest rates or exchange rates remain unchanged is approximately $4 million after-tax. These contracts mature in up to 35 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 the receive-fixed/pay-variable interest rate contracts at October 31, 2011 and 2010 were $7,730 million and $6,640 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 $5 million in 2011 and a gain of $1 million in 2010. 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 follow in millions of dollars:

	2011			2010
Interest rate contracts*	$	16		$	150
Borrowings**	(21		)	(149		)

* Includes changes in fair values of interest rate contracts excluding net accrued interest income of $172 million and $222 million during 2011 and 2010, respectively.

**Includes adjustments for fair values of hedged borrowings excluding accrued interest expense of $277 million and $336 million during 2011 and 2010, 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 and purchases or sales of inventory. The total notional amounts of the interest rate swaps at October 31, 2011 and 2010 were $3,216 million and $2,702 million, the foreign exchange contracts were $3,058 million and $2,777 million and the cross-currency interest rate contracts were $52 million and $60 million, respectively. At October 31, 2011 and 2010, there were also $1,402 million and $1,055 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 cost of sales or other 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 at October 31 in millions of dollars follow:

	2011		2010
Other Assets
Designated as hedging instruments:
Interest rate contracts	$	404	$	457
Not designated as hedging instruments:
Interest rate contracts	67		36
Foreign exchange contracts	12		24
Cross-currency interest rate contracts	2		3
Total not designated	81		63
Total derivatives	$	485	$	520
Accounts Payable and Accrued Expenses
Designated as hedging instruments:
Interest rate contracts	$	13	$	18
Cross-currency interest rate contracts	7		47
Total designated	20		65
Not designated as hedging instruments:
Interest rate contracts	48		20
Foreign exchange contracts	100		23
Cross-currency interest rate contracts			1
Total not designated	148		44
Total derivatives	$	168	$	109

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:

	2011			2010			2009
Fair Value Hedges
Interest rate contracts — Interest expense	$	188		$	372		$	453
Cash Flow Hedges
Recognized in OCI
(Effective Portion):
Interest rate contracts — OCI (pretax)*	(5		)	(14		)	(90		)
Foreign exchange contracts — OCI (pretax)*	36			(42		)
Reclassified from OCI
(Effective Portion):
Interest rate contracts — Interest expense*	(20		)	(68		)	(84		)
Foreign exchange contracts — Other expense*	19			(11		)
Recognized Directly in Income
(Ineffective Portion):
Interest rate contracts — Interest expense*	**			**			**
Foreign exchange contracts — Other expense*	**			**			**
Not Designated as Hedges
Interest rate contracts — Interest expense*	(1		)	25			(5		)
Foreign exchange contracts — Cost of sales	(51		)	(19		)	(64		)
Foreign exchange contracts — Other expense*	(127		)	(92		)	(90		)
Total not designated	$	(179	)	$	(86	)	$	(159	)

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

**The amount is not significant.