DERIVATIVE INSTRUMENTS

12 Months Ended

Oct. 30, 2022

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

26. DERIVATIVE INSTRUMENTS

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 October 30, 2022 and October 31, 2021 were $1,950 million and $2,700 million, respectively. Fair value gains or losses on cash flow hedges are recorded in OCI and subsequently reclassified into interest expense in the same periods during which the hedged transactions impact earnings. These amounts offset the effects of interest rate changes on the related borrowings.

The amount of gain recorded in OCI at October 30, 2022 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 $44 million after-tax. 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 30, 2022 and October 31, 2021 were $10,112 million and $8,043 million, respectively. The fair value gains or losses on these contracts were offset by fair value gains or losses on the hedged items (fixed-rate borrowings) with both items recorded in interest expense.

The amounts recorded, at October 30, 2022 and October 31, 2021, in the consolidated balance sheets related to borrowings designated in fair value hedging relationships were as follows in millions of dollars. Fair value hedging adjustments are included in the carrying amount of the hedged item.

	Active Hedging				Discontinued Hedging
	Relationships				Relationships
	Carrying		Cumulative		Carrying		Cumulative
	Amount of		Fair Value		Amount of		Fair Value
	Hedged		Hedging		Formerly		Hedging
	Item		Amount		Hedged Item		Amount
2022
Short-term borrowings					$	2,515	$	15
Long-term borrowings	$	9,060	$	(1,006)		5,520		(19)
2021
Short-term borrowings	$	191	$	3	$	1,997	$	(2)
Long-term borrowings		7,847		29		6,287		223

Derivatives Not Designated as Hedging Instruments

The company has certain interest rate contracts (swaps), foreign currency exchange contracts (futures, 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 for certain borrowings, purchases or sales of inventory, and sales incentive programs. The total notional amounts of the interest rate swaps at October 30, 2022 and October 31, 2021 were $10,568 million and $10,848 million, the foreign currency exchange contracts were $8,185 million and $7,584 million, and the cross-currency interest rate contracts were $260 million and

$238 million, respectively. The fair value gains or losses from derivatives not designated as hedging instruments were recorded in the statements of consolidated income, generally offsetting over time the exposure on the hedged item.

Fair values of derivative instruments in the consolidated balance sheets at October 30, 2022 and October 31, 2021 in millions of dollars follow:

	2022		2021
Other Assets
Designated as hedging instruments:
Interest rate contracts	$	87	$	166
Not designated as hedging instruments:
Interest rate contracts		212		73
Foreign exchange contracts		66		31
Cross-currency interest rate contracts		8		5
Total not designated		286		109
Total derivative assets	$	373	$	275
Accounts Payable and Accrued Expenses
Designated as hedging instruments:
Interest rate contracts	$	1,004	$	99
Not designated as hedging instruments:
Interest rate contracts		107		33
Foreign exchange contracts		118		94
Cross-currency interest rate contracts		2		2
Total not designated		227		129
Total derivative liabilities	$	1,231	$	228

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

	2022		2021		2020
Fair Value Hedges
Interest rate contracts – Interest expense	$	(1,144)	$	(236)	$	496
Cash Flow Hedges
Recognized in OCI:
Interest rate contracts – OCI (pretax)		89		8		(18)
Reclassified from OCI:
Interest rate contracts – Interest expense		9		(13)		(21)
Not Designated as Hedges
Interest rate contracts – Net sales	$	53	$	13	$	(23)
Interest rate contracts – Interest expense*		81		14		(2)
Foreign exchange contracts – Net sales		(6)
Foreign exchange contracts – Cost of sales		(64)		(101)		93
Foreign exchange contracts – Other operating expenses*		402		(262)		122
Total not designated	$	466	$	(336)	$	190

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

      interest rate contracts.

Counterparty Risk and Collateral

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, the credit default swap spread of the

counterparty, and 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 or termination.

Certain of the company’s derivative agreements contain credit support provisions that may require the company to post collateral based on the size of the net liability positions and credit ratings. The aggregate fair value of all derivatives with credit-risk-related contingent features that were in a net liability position at October 30, 2022 and October 31, 2021, was $1,113 million and $135 million, respectively. In accordance with the limits established in these agreements, the company posted $701 million of cash collateral at October 30, 2022 and no cash collateral at October 31, 2021. In addition, the company paid $8 million of collateral either in cash or pledged securities that was outstanding at both October 30, 2022 and October 31, 2021 to participate in an international futures market to hedge currency exposure, not included in the table below.

Derivatives are recorded without offsetting for netting arrangements or collateral. The impact on the derivative assets and liabilities related to netting arrangements and collateral at October 30, 2022 and October 31, 2021 in millions of dollars follows:

	Gross Amounts		Netting				Net
	Recognized		Arrangements		Collateral		Amount
2022
Assets	$	373	$	(179)	$	(54)	$	140
Liabilities		1,231		(179)		(701)		351
2021
Assets	$	275	$	(105)			$	170
Liabilities		228		(105)	$	(5)		118