Derivatives and Hedging

The Company is exposed to market risks, including changes in foreign currency exchange rates and interest rates. To manage the risk related to these exposures, the Company enters into various derivative instruments that reduce these risks by creating offsetting exposures. The Company does not enter into derivative transactions for trading or speculative purposes.

Foreign Exchange Risk Management

The Company is exposed to foreign exchange risk when it earns revenues, pays expenses, enters into monetary intercompany transfers or other transactions denominated in a currency that differs from its functional currency. The Company uses foreign exchange derivatives, typically forward contracts, options and cross currency swaps, to reduce its overall exposure to the effects of currency fluctuations on cash flows. These exposures are hedged, on average, for less than two years. These derivatives are accounted for as hedges, and changes in fair value are recorded each period in Other comprehensive income (loss) in the Condensed Consolidated Statements of Comprehensive Income.

The Company also uses foreign exchange derivatives, typically forward contracts and options, to economically hedge the currency exposure of the Company’s global liquidity profile, including monetary assets or liabilities that are denominated in a non-functional currency of an entity, typically on a rolling 30-day basis, but may be for up to one year in the future. These derivatives are not accounted for as hedges, and changes in fair value are recorded each period in Other income (expense) in the Condensed Consolidated Statements of Income.

The notional and fair values of derivative instruments are as follows (in millions):



	Notional Amount				Net Amount of Derivative Assets Presented in the Statements of Financial Position ⁽¹⁾				Net Amount of Derivative Liabilities Presented in the Statements of Financial Position ⁽²⁾
	June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017
Foreign exchange contracts
Accounted for as hedges	$	668	$	701	$	21	$	31	$	2	$	3
Not accounted for as hedges ⁽³⁾	315		254		—		1		3		3
Total	$	983	$	955	$	21	$	32	$	5	$	6


(1)	Included within Other current assets ($4 million at June 30, 2018 and $9 million at December 31, 2017) or Other non-current assets ($17 million at June 30, 2018 and $23 million at December 31, 2017).


(2)	Included within Other current liabilities ($1 million at June 30, 2018 and $3 million at December 31, 2017) or Other non-current liabilities ($4 million at June 30, 2018 and $3 million at December 31, 2017).


(3)	These contracts typically are for 30 day durations and executed close to the last day of the most recent reporting month, thereby resulting in nominal fair values at the balance sheet date.

The amounts of derivative gains (losses) recognized in the Financial Statements are as follows (in millions):



	Three Months Ended						Six Months Ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Gain (Loss) Recognized in Accumulated Other Comprehensive Loss	$	(25	)	$	1		$	(11	)	$	7

Location of future reclassification from Accumulated Other Comprehensive Loss
Compensation and benefits	$	(4	)	$	1		$	(4	)	$	9
Other general expenses	$	(1	)	$	1		$	3		$	2
Other income (expense)	$	(20	)	$	(1	)	$	(10	)	$	(4	)

The amounts of derivative gains (loss) reclassified from Accumulated other comprehensive loss into the Condensed Consolidated Statements of Income (effective portion) are as follows (in millions):



	Three Months Ended						Six Months Ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Compensation and benefits	$	—		$	—		$	1		$	13
Other general expenses	(1		)	(1		)	(2		)	(2		)
Interest expense	—			(1		)	(1		)	(1		)
Other income (expense)	(1		)	(2		)	(4		)	(4		)
Total	$	(2	)	$	(4	)	$	(6	)	$	6

The Company estimates that approximately $10 million of pretax losses currently included within Accumulated other comprehensive loss will be reclassified in to earnings in the next twelve months.

The amount of gain (loss) recognized in income on the ineffective portion of derivatives for the three and six months ended June 30, 2018 and 2017 was insignificant.

During the three and six months ended June 30, 2018, the Company recorded a loss of $20 million and a loss of $11 million, respectively, in Other income (expense) for foreign exchange derivatives not designated or qualifying as hedges. During the three and six months ended June 30, 2017, the Company recorded a loss of $1 million and a gain of $0.4 million, respectively, in Other income (expense) for foreign exchange derivatives not designated or qualifying as hedges.

Net Investments in Foreign Operations Risk Management

The Company uses non-derivative financial instruments to protect the value of its investments in a number of foreign subsidiaries. In 2016, the Company designated a portion of its Euro-denominated commercial paper issuances as a non-derivative hedge of the foreign currency exposure of a net investment in its European operations. The change in fair value of the designated portion of the Euro-denominated commercial paper due to changes in foreign currency exchange rates is recorded in Foreign currency translation adjustment, a component of Accumulated other comprehensive loss, to the extent it is effective as a hedge. The foreign currency translation adjustment of the hedged net investments that is also recorded in Accumulated other comprehensive loss. Ineffective portions of net investment hedges, if any, are reclassified from Accumulated other comprehensive loss into earnings during the period of change.

As of June 30, 2018, the Company has €220 million ($256 million at June 30, 2018 exchange rates) of outstanding Euro-denominated commercial paper designated as a hedge of the foreign currency exposure of its net investment in its European operations. As of June 30, 2018, the unrealized gain recognized in Accumulated other comprehensive loss related to the net investment non derivative hedging instrument was $15 million.

The Company did not reclassify any deferred gains or losses related to net investment hedges from Accumulated other comprehensive loss to earnings during the three and six months ended June 30, 2018 and 2017. In addition, the Company did not incur any ineffectiveness related to net investment hedges during the three and six months ended June 30, 2018 and 2017.