Derivative Financial Instruments

We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. We use derivative financial instruments to manage our exposure to foreign currency exchange rate risk and do not enter into derivative financial contracts for trading purposes. Consistent with our risk management guidelines, we hedge a portion of our transactions related to merchandise purchases for foreign operations and certain intercompany transactions using foreign exchange forward contracts. These contracts are entered into with large, reputable financial institutions that are monitored for counterparty risk. The currencies hedged against changes in the U.S. dollar are Canadian dollars, Japanese yen, British pounds, Euro, Mexican pesos, Taiwan dollars and Chinese yuan. Cash flows from derivative financial instruments are classified as cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows.

Cash Flow Hedges

We designate the following foreign exchange forward contracts as cash flow hedges: (1) forward contracts used to hedge forecasted merchandise purchases and related costs denominated in U.S. dollars made by our international subsidiaries whose functional currencies are their local currencies; (2) forward contracts used to hedge forecasted intercompany royalty payments denominated in foreign currencies received by entities whose functional currencies are U.S. dollars; and (3) forward contracts used to hedge forecasted intercompany revenue transactions related to merchandise sold from our regional purchasing entity, whose functional currency is the U.S. dollar, to certain international subsidiaries in their local currencies. The foreign exchange forward contracts entered into to hedge forecasted merchandise purchases and related costs, intercompany royalty payments, and intercompany revenue transactions generally have terms of up to 24 months. The effective portion of the gain or loss on the derivative financial instruments is reported as a component of other comprehensive income and is recognized in income in the period in which the underlying transaction impacts the Condensed Consolidated Statements of Income.

Net Investment Hedges

We may also use foreign exchange forward contracts to hedge the net assets of international subsidiaries to offset the foreign currency translation and economic exposures related to our investment in these subsidiaries.

Other Derivatives Not Designated as Hedging Instruments

We use foreign exchange forward contracts to hedge our market risk exposure associated with foreign currency exchange rate fluctuations for certain intercompany balances denominated in currencies other than the functional currency of the entity with the intercompany balance. The gain or loss on the derivative financial instruments that represent economic hedges, as well as the remeasurement impact of the underlying intercompany balances, is recorded in operating expenses in the Condensed Consolidated Statements of Income in the same period and generally offset each other.

Outstanding Notional Amounts

We had foreign exchange forward contracts outstanding in the following notional amounts:



($ in millions)	November 3, 2018		February 3, 2018		October 28, 2017
Derivatives designated as cash flow hedges	$	815	$	745	$	873
Derivatives designated as net investment hedges	—		—		30
Derivatives not designated as hedging instruments	717		577		581
Total	$	1,532	$	1,322	$	1,484

Quantitative Disclosures about Derivative Financial Instruments

The fair values of foreign exchange forward contracts are as follows:



($ in millions)	November 3, 2018		February 3, 2018		October 28, 2017
Derivatives designated as cash flow hedges:
Other current assets	$	21	$	11	$	16
Other long-term assets	$	5	$	—	$	4
Accrued expenses and other current liabilities	$	1	$	32	$	11
Lease incentives and other long-term liabilities	$	—	$	—	$	2

Derivatives designated as net investment hedges:
Other current assets	$	—	$	—	$	—
Other long-term assets	$	—	$	—	$	—
Accrued expenses and other current liabilities	$	—	$	—	$	2
Lease incentives and other long-term liabilities	$	—	$	—	$	—

Derivatives not designated as hedging instruments:
Other current assets	$	20	$	3	$	11
Other long-term assets	$	—	$	—	$	—
Accrued expenses and other current liabilities	$	—	$	11	$	5
Lease incentives and other long-term liabilities	$	—	$	—	$	—

Total derivatives in an asset position	$	46	$	14	$	31
Total derivatives in a liability position	$	1	$	43	$	20

The majority of the unrealized gains and losses from designated cash flow hedges as of November 3, 2018, will be recognized in income within the next 12 months at the then-current values, which may differ from the fair values as of November 3, 2018, shown above.

Our foreign exchange forward contracts are subject to master netting arrangements with each of our counterparties and such arrangements are enforceable in the event of default or early termination of the contract. We do not elect to offset the fair values of our derivative financial instruments on the Condensed Consolidated Balance Sheets, and as such, the fair values shown above represent gross amounts. The amounts subject to enforceable master netting arrangements are $1 million, $1 million, and $8 million as of November 3, 2018, February 3, 2018, and October 28, 2017, respectively. If we did elect to offset, the net amounts of our derivative financial instruments in an asset position would be $45 million, $13 million, and $23 million and the net amounts of the derivative financial instruments in a liability position would be $0, $42 million, and $12 million as of November 3, 2018, February 3, 2018, and October 28, 2017, respectively.

See Note 4 of Notes to Condensed Consolidated Financial Statements for disclosures on the fair value measurements of our derivative financial instruments.

The effective portion of gains and losses on foreign exchange forward contracts in cash flow hedging and net investment hedging relationships recorded in other comprehensive income and the Condensed Consolidated Statements of Income, on a pre-tax basis, are as follows:



	13 Weeks Ended						39 Weeks Ended
($ in millions)	November 3, 2018			October 28, 2017			November 3, 2018			October 28, 2017
Derivatives in cash flow hedging relationships:
Gain (loss) recognized in other comprehensive income	$	12		$	25		$	55		$	(26	)
Gain (loss) reclassified into cost of goods sold and occupancy expenses	$	(8	)	$	(5	)	$	(5	)	$	2
Gain (loss) reclassified into operating expenses	$	—		$	—		$	—		$	—

Derivatives in net investment hedging relationships:
Gain (loss) recognized in other comprehensive income	$	—		$	1		$	—		$	(1	)

For the thirteen and thirty-nine weeks ended November 3, 2018 and October 28, 2017, there were no amounts of gains or losses reclassified from accumulated other comprehensive income into net income for derivative financial instruments in net investment hedging relationships, as we did not sell or liquidate (or substantially liquidate) any of our hedged subsidiaries during the periods.

Gains and losses on foreign exchange forward contracts not designated as hedging instruments recorded in the Condensed Consolidated Statements of Income, on a pre-tax basis, are as follows:



	13 Weeks Ended				39 Weeks Ended
($ in millions)	November 3, 2018		October 28, 2017		November 3, 2018		October 28, 2017
Gain (loss) recognized in operating expenses	$	14	$	10	$	38	$	(13	)