6.	Financial Instruments

The fair value of the Company’s financial instruments is generally determined by reference to market values resulting from trading on a national securities exchange or in an over-the-counter market. In some cases where quoted market prices are not available, prices are derived by considering the yield of the benchmark security that was issued to initially price the instruments and adjusting this rate by the credit spread that market participants would demand for the instruments as of the measurement date. The carrying amounts of cash and cash equivalents, accounts receivable, program cash and accounts payable and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities.

Debt Instruments

The carrying amounts and estimated fair values of debt instruments are as follows:


	As of June 30, 2012				As of December 31, 2011
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Corporate debt
Short-term debt and current portion of long-term debt ^(a)	$	39	$	39	$	37	$	37
Long-term debt, excluding convertible debt ^(a)		2,828		2,961		2,823		2,842
Convertible debt ^(b)		144		181		345		354

Debt under vehicle programs
Vehicle-backed debt due to Avis Budget Rental Car Funding (AESOP) LLC ^(a)	$	6,268	$	6,419	$	4,574	$	4,643
Vehicle-backed debt ^(a)		2,026		2,040		986		1,001
Interest rate swaps and interest rate contracts ^(c)		1		1		4		4

^(a)	The fair value measurements are based on significant observable inputs (Level 2).

^(b)	The fair value measurements are based on quoted market prices (Level 1).

^(c)	Derivatives in a liability position.

Derivative Instruments and Hedging Activities

The Company uses foreign exchange contracts to manage its exposure to changes in currency exchange rates associated with its foreign currency denominated receivables and forecasted royalties, forecasted earnings of foreign subsidiaries and forecasted foreign currency denominated acquisitions. The Company primarily hedges its foreign currency exposure to the Australian, Canadian and New Zealand dollars, the Euro and the British pound sterling. The majority of forward contracts do not qualify for hedge accounting treatment. The fluctuations in the value of these forward contracts do, however, largely offset the impact of changes in the value of the underlying risk they economically hedge. The amount of gains or losses reclassified from accumulated other comprehensive income to earnings resulting from ineffectiveness or from excluding a component of the forward contracts’ gain or loss from the effectiveness calculation for cash flow hedges during the three and six months ended June 30, 2012 and 2011 was not material, nor is the amount of gains or losses the Company expects to reclassify from accumulated other comprehensive income to earnings over the next 12 months.

The Company uses various hedging strategies including interest rate swaps and interest rate caps to create an appropriate mix of fixed and floating rate assets and liabilities. The Company uses interest rate swaps to manage the risk related to its floating rate corporate debt and its floating rate vehicle-backed debt. The Company records the effective portion of changes in the fair value of its cash flow hedges to other comprehensive income, net of tax, and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized. The Company records the gains or losses related to freestanding derivatives, which are not designated as a hedge for accounting purposes, in its consolidated results of operations. The changes in fair values of hedges that were determined to be ineffective are immediately reclassified from accumulated other comprehensive income into earnings. The Company estimates that approximately $5 million of losses deferred in accumulated other comprehensive income will be recognized over the next twelve months, which is expected to be offset in earnings by the impact of the underlying hedged items.

From time to time, the Company enters into derivative commodity contracts to manage its exposure to changes in the price of unleaded gasoline. Changes in the fair value of these derivatives are recorded within operating expenses.

Certain of the Company’s derivative instruments contain collateral support provisions that require the Company to post cash collateral to the extent that these derivatives are in a liability position. The aggregate fair value of such derivatives that are in a liability position and the aggregate fair value of assets needed to settle these derivatives as of June 30, 2012 was approximately $2 million, for which the Company has posted cash collateral in the normal course of business.

As of June 30, 2012, the Company held derivative instruments with absolute notional values as follows: interest rate caps of approximately $8.1 billion, (representing approximately $7.2 billion of interest rate caps purchased, partially offset by approximately $1.0 billion of interest rate caps sold), interest rate swaps of $625 million, foreign exchange forward contracts of $257 million, foreign exchange swaps of $940 million and commodity contracts for the purchase of 9 million gallons of unleaded gasoline.

The Company used significant observable inputs (Level 2 inputs) to determine the fair value of its derivative assets and liabilities. Derivatives entered into by the Company are typically executed over-the-counter and are valued using various valuation techniques, as no quoted market prices exist for such instruments. The valuation technique and inputs depend on the type of derivative and the nature of the underlying exposure. The principal techniques used to value these instruments are discounted cash flows and Black-Scholes option valuation models. These models take into account a variety of factors including, where applicable, maturity, commodity prices, interest rate yield curves of the Company and counterparties, credit curves, counterparty creditworthiness and currency exchange rates. These factors are applied on a consistent basis and are based upon observable inputs where available.

Fair values of derivatives instruments are as follows:


	As of June 30, 2012				As of December 31, 2011
	Fair Value, Asset Derivatives		Fair Value, Liability Derivatives		Fair Value, Asset Derivatives		Fair Value, Liability Derivatives
Derivatives designated as hedging instruments ^(a)
Interest rate swaps ^(b)	$	—	$	2	$	—	$	3

Derivatives not designated as hedging instruments ^(a)
Foreign exchange forward contracts ^(c)		4		26		26		1
Interest rate contracts ^(d)		1		1		2		4
Interest rate swaps ^(b)		—		8		—		—
Commodity contracts ^(c)		—		2		—		1

Total	$	5	$	39	$	28	$	9

^(a)

Amounts in this table exclude derivatives issued by Avis Budget Rental Car Funding (AESOP) LLC (“Avis Budget Rental Car Funding”), as it is not consolidated by the Company; however, certain amounts related to the derivatives held by Avis Budget Rental Car Funding are included within accumulated other comprehensive income, as discussed in Note 13—Stockholders’ Equity.

^(b)	Included in other non-current liabilities.

^(c)	Included in other current assets and other current liabilities.

^(d)	Included in assets under vehicle programs and liabilities under vehicle programs.

The effect of derivatives recognized in the Company’s Consolidated Condensed Financial Statements are as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Derivatives designated as hedging instruments
Interest rate swaps ^(a)	$	4		$	6		$	11		$	16

Derivatives not designated as hedging instruments
Foreign exchange contracts ^(b)		6			(16	)		2			(17	)
Commodity contracts ^(c)		(5	)		—			1			1
Interest rate contracts ^(d)		(3	)		—			(8	)		—

Total	$	2		$	(10	)	$	6		$	—

^(a)	Recognized, net of tax, as a component of other comprehensive income within stockholders’ equity.

^(b)

For the three and six months ended June 30, 2012, amounts are included in operating expenses. For the three months ended June 30, 2011, includes $17 million loss in transaction-related costs and a $1 million gain in operating expenses. For the six months ended June 30, 2011, includes a $17 million loss in transaction-related costs.

^(c)	Included in operating expenses.

^(d)	Included in interest expense.