DERIVATIVE INSTRUMENTS

12 Months Ended

Oct. 31, 2012

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, 2012 and 2011 was $32 million and $23 million, respectively. The company, due to its credit rating and amounts of net liability position, has not posted any collateral. If the credit-risk-related contingent features were triggered, the company would be required to post full collateral for 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 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 credit support provisions. Each master agreement permits the net settlement of amounts owed in the event of default. 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 $637 million and $485 million as of October 31, 2012 and 2011, respectively. The amount of collateral received at October 31, 2012 and 2011 to offset this potential maximum loss was $102 million and $25 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 $92 million and $59 million as of October 31, 2012 and 2011, respectively. None of the concentrations of risk with any individual counterparty was considered significant at October 31, 2012 and 2011.

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, 2012 and 2011 were $2,850 million and $1,350 million, respectively. The total notional amounts of the cross-currency interest rate contracts were $923 million and $853 million at October 31, 2012 and 2011, 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, 2012 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 $10 million after-tax. These contracts mature in up to 71 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, 2012 and 2011 were $9,266 million and $7,730 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 $2 million in 2012 and a loss of $5 million in 2011. 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:

	2012			2011
Interest rate contracts*	$	180		$	16
Borrowings**	(182		)	(21		)

*Includes changes in fair values of interest rate contracts excluding net accrued interest income of $155 million and $172 million during 2012 and 2011, respectively.

**Includes adjustments for fair values of hedged borrowings excluding accrued interest expense of $282 million and $277 million during 2012 and 2011, 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, 2012 and 2011 were $4,400 million and $3,216 million, the foreign exchange contracts were $3,999 million and $3,058 million and the cross-currency interest rate contracts were $78 million and $52 million, respectively. At October 31, 2012 and 2011, there were also $1,445 million and $1,402 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:

	2012		2011
Other Assets
Designated as hedging instruments:
Interest rate contracts	$	536	$	404
Cross-currency interest rate contracts	10
Total designated	546		404
Not designated as hedging instruments:
Interest rate contracts	73		67
Foreign exchange contracts	17		12
Cross-currency interest rate contracts	1		2
Total not designated	91		81
Total derivatives	$	637	$	485
Accounts Payable and Accrued Expenses
Designated as hedging instruments:
Interest rate contracts	$	12	$	13
Cross-currency interest rate contracts	58		7
Total designated	70		20
Not designated as hedging instruments:
Interest rate contracts	60		48
Foreign exchange contracts	18		100
Cross-currency interest rate contracts	1
Total not designated	79		148
Total derivatives	$	149	$	168

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:

	2012			2011			2010
Fair Value Hedges
Interest rate contracts — Interest expense	$	335		$	188		$	372
Cash Flow Hedges
Recognized in OCI
(Effective Portion):
Interest rate contracts — OCI (pretax)*	(28		)	(5		)	(14		)
Foreign exchange contracts — OCI (pretax)*	(33		)	36			(42		)
Reclassified from OCI
(Effective Portion):
Interest rate contracts — Interest expense*	(16		)	(20		)	(68		)
Foreign exchange contracts — Other expense*	(38		)	19			(11		)
Recognized Directly in Income
(Ineffective Portion)	**			**			**
Not Designated as Hedges
Interest rate contracts — Interest expense*	$	(13	)	$	(1	)	$	25
Foreign exchange contracts — Cost of sales	(12		)	(51		)	(19		)
Foreign exchange contracts — Other expense*	7			(127		)	(92		)
Total not designated	$	(18	)	$	(179	)	$	(86	)

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

**The amounts are not significant.