DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

In the normal course of business, our operations are exposed to global market risks, including the effect of changes in foreign currency exchange rates, certain commodity prices, and interest rates. To manage these risks, we enter into highly effective derivative contracts. We have elected to apply hedge accounting to certain derivatives. Derivatives that are designated in hedging relationships are evaluated for effectiveness using regression analysis at the time they are designated and throughout the hedge period. Some derivatives do not qualify for hedge accounting; for others, we elect not to apply hedge accounting.

Income Effect of Derivative Financial Instruments

The gains/(losses), by hedge designation, reported in income for the periods ended March 31 were as follows (in millions):



	First Quarter
Cash flow hedges (a)	2018			2019
Reclassified from AOCI to Cost of sales
Foreign currency exchange contracts	$	17		$	54
Commodity contracts	—			(5		)
Fair value hedges
Interest rate contracts
Net interest settlements and accruals on hedging instruments	26			(20		)
Fair value changes on hedging instruments	(339		)	250
Fair value changes on hedged debt	329			(253		)
Derivatives not designated as hedging instruments
Foreign currency exchange contracts (b)	(116		)	(28		)
Cross-currency interest rate swap contracts	(58		)	(145		)
Interest rate contracts	(17		)	(27		)
Commodity contracts	(46		)	11
Total	$	(204	)	$	(163	)

__________


(a)	For the first quarter of 2018 and 2019, a $61 million gain and a $521 million loss, respectively, were reported in Other comprehensive income/(loss), net of tax related to foreign currency contracts; for first quarter 2019, an $11 million gain was reported in Other comprehensive income/(loss), net of tax related to commodity contracts.


(b)	For the first quarter of 2018 and 2019, a $104 million loss and a $22 million loss were reported in Cost of sales and a $12 million loss and a $6 million loss were reported in Other income/(loss), net, respectively.

NOTE 17. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

Balance Sheet Effect of Derivative Financial Instruments

Derivative assets and liabilities are reported on our consolidated balance sheet at fair value and are presented on a gross basis. The notional amounts of the derivative instruments do not necessarily represent amounts exchanged by the parties and are not a direct measure of our financial exposure. We also enter into master agreements with counterparties that may allow for netting of exposures in the event of default or breach of the counterparty agreement. Collateral represents cash received or paid under reciprocal arrangements that we have entered into with our derivative counterparties which we do not use to offset our derivative assets and liabilities.

The fair value of our derivative instruments and the associated notional amounts, presented gross, were as follows (in millions):



	December 31, 2018						March 31, 2019
	Notional		Fair Value of Assets		Fair Value of Liabilities		Notional		Fair Value of Assets		Fair Value of Liabilities
Cash flow hedges
Foreign currency exchange contracts	$	15,972	$	391	$	110	$	15,310	$	183	$	429
Commodity contracts	327		—		20		597		4		9
Fair value hedges
Interest rate contracts	22,989		158		208		23,894		217		143
Derivatives not designated as hedging instruments
Foreign currency exchange contracts	20,695		202		99		22,171		221		129
Cross-currency interest rate swap contracts	5,235		232		157		6,331		146		216
Interest rate contracts	76,904		235		274		67,726		216		295
Commodity contracts	638		3		45		441		4		15
Total derivative financial instruments, gross (a) (b)	$	142,760	$	1,221	$	913	$	136,470	$	991	$	1,236

Current portion			$	681	$	601			$	500	$	868
Non-current portion			540		312				491		368
Total derivative financial instruments, gross			$	1,221	$	913			$	991	$	1,236

__________


(a)	At December 31, 2018 and March 31, 2019, we held collateral of $19 million and $26 million, and we posted collateral of $59 million and $63 million, respectively.


(b)	At December 31, 2018 and March 31, 2019, the fair value of assets and liabilities available for counterparty netting was $434 million and $529 million, respectively. All derivatives are categorized within Level 2 of the fair value hierarchy.