Altria enters into derivative financial instruments to mitigate the potential impact of certain market risks, including foreign currency exchange rate risk. Altria uses various types of derivative financial instruments, including forward contracts, options and swaps. Altria does not enter into or hold derivative financial instruments for trading or speculative purposes.

Altria’s investment in ABI, whose functional currency is the Euro, exposes Altria to foreign currency exchange risk on the carrying value of its investment. To manage this risk, Altria designates certain foreign exchange contracts, including cross-currency swap contracts and forward contracts (collectively “foreign currency contracts”), and Euro denominated notes (“foreign currency denominated debt”) as net investment hedges of Altria’s investment in ABI.

At September 30, 2019 and December 31, 2018, Altria had foreign currency contracts with aggregate notional amounts of $1,391 million and $1,226 million, respectively. At September 30, 2019, Altria had foreign currency denominated debt with an aggregate fair value and carrying value of $4,937 million and $4,608 million, respectively. At December 31, 2018, Altria had no foreign currency denominated debt.

Altria’s estimates of the fair values of its foreign currency contracts are determined using valuation models with significant inputs that are readily available in public markets, or can be derived from observable market transactions, and therefore are classified in Level 2 of the fair value hierarchy. An adjustment for credit risk and nonperformance risk is included in the fair values of foreign currency contracts. See Note 11. Debt for a discussion of the fair value hierarchy related to Altria’s debt.

Altria’s Fixed-price Preemptive Rights and warrant related to its investment in Cronos, which is further discussed in Note 5. Investments in Equity Securities, are derivative financial instruments, which are required to be recorded at fair value. The fair values of the Fixed-price Preemptive Rights and warrant are estimated using Black-Scholes option-pricing models, adjusted for unobservable inputs, including probability factors and weighting of expected life, volatility levels and risk-free interest rates (which are classified in Level 3 of the fair value hierarchy) based on the following assumptions at:



	September 30, 2019	March 8, 2019	September 30, 2019	March 8, 2019
	Fixed-price Preemptive Rights		Warrant
Expected life ⁽¹⁾	1.93 years	2.32 years	3.43 years	4 years
Expected volatility ⁽²⁾	81.55%	93.02%	81.55%	93.02%
Risk-free interest rate ⁽³⁾⁽⁴⁾	1.61%	1.61%	1.49%	1.67%
Expected dividend yield ⁽⁵⁾	—%	—%	—%	—%

⁽¹⁾ Based on the weighted-average expected life of the Fixed-price Preemptive Rights (with a range from approximately 1 year to 7 years at September 30, 2019 and March 8, 2019) and the March 8, 2023 expiration date of the warrant.

⁽³⁾ Based on the implied yield currently available on Canadian Treasury zero coupon issues weighted for the remaining expected life of the Fixed-price Preemptive Rights.

The following table provides a reconciliation of the beginning and ending balance of the Fixed-price Preemptive Rights and warrant, which are classified in Level 3 of the fair value hierarchy:



	(in millions)
Balance at December 31, 2018	$	—
Initial investment in Fixed-price Preemptive Rights and warrant	1,736
Exercise of Preemptive Rights	(22		)
Pre-tax earnings (losses) recognized in net earnings	(1,296		)
Balance at September 30, 2019	$	418

Altria elects to record the gross assets and liabilities of derivative financial instruments executed with the same counterparty on its condensed consolidated balance sheets. The fair values of Altria’s derivative financial instruments on a gross basis included on the condensed consolidated balance sheets were as follows:



	Fair Value of Assets					Fair Value of Liabilities
	Balance Sheet Classification	September 30, 2019		December 31, 2018		Balance Sheet Classification	September 30, 2019		December 31, 2018
Derivatives designated as hedging instruments:	(in millions)
Foreign currency contracts	Other current assets	$	69	$	37	Other accrued liabilities	$	—	$	—
Foreign currency contracts	Other assets	17		4		Other liabilities	—		4
Total		$	86	$	41		$	—	$	4

Derivatives not designated as hedging instruments:
Cronos warrant	Investments in equity securities	$	315	$	—
Fixed-price Preemptive Rights	Investments in equity securities	103		—
Total		$	418	$	—

Total derivatives		$	504	$	41		$	—	$	4

Altria records in its condensed consolidated statements of earnings any changes in the fair values of the Fixed-price Preemptive Rights and warrant as gains or losses on Cronos-related financial instruments in the periods in which the changes occur. For the nine months ended September 30, 2019, Altria recognized pre-tax unrealized losses of $1,296 million, consisting of $400 million and $896 million, representing the changes in the fair values of the Fixed-price Preemptive Rights and warrant, respectively. For the three months ended September 30, 2019, Altria recognized pre-tax unrealized losses of $636 million, consisting of $188 million and $448 million, representing the changes in the fair values of the Fixed-price Preemptive Rights and warrant, respectively.

In January and February 2019, Altria entered into derivative financial instruments in the form of forward contracts, which were settled on March 7, 2019, to hedge Altria’s exposure to CAD to USD foreign currency exchange rate movements, in relation to the CAD $2.4 billion purchase price for the Cronos transaction. The aggregate notional amounts of the forward contracts were USD $1.8 billion (CAD $2.4 billion). The forward contracts did not qualify for hedge accounting; therefore, in the first quarter of 2019, pre-tax losses of USD $31 million representing changes in the fair values of the forward contracts were recorded in loss on Cronos-related financial instruments in Altria’s condensed consolidated statement of earnings.

Counterparties to Altria’s foreign currency contracts are domestic and international financial institutions. Altria is exposed to potential losses due to non-performance by these counterparties. Altria manages its credit risk by entering into transactions with counterparties with investment grade credit ratings, limiting the amount of exposure Altria has with each counterparty, and monitoring the financial condition of each counterparty. No amounts of collateral were received or posted related to derivative assets and liabilities at September 30, 2019 and December 31, 2018.

The pre-tax effects of Altria’s net investment hedges on accumulated other comprehensive losses and the condensed consolidated statements of earnings were as follows:



	Gain (Loss) Recognized in Accumulated Other Comprehensive Losses				Gain (Loss) Recognized in Net Earnings ⁽¹⁾				Gain (Loss) Recognized in Accumulated Other Comprehensive Losses				Gain (Loss) Recognized in Net Earnings ⁽¹⁾
	For the Nine Months Ended September 30,								For the Three Months Ended September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
	(in millions)
Foreign currency contracts	$	70	$	46	$	26	$	26	$	57	$	7	$	10	$	10
Foreign currency denominated debt	168		—		—		—		200		—		—		—
Total	$	238	$	46	$	26	$	26	$	257	$	7	$	10	$	10

The changes in the fair value of the foreign currency contracts and in the carrying value of the foreign currency denominated debt due to changes in the Euro to USD exchange rate were recognized in accumulated other comprehensive losses related to ABI. Gains on the foreign currency contracts arising from components excluded from effectiveness testing were recognized in interest and other debt expense, net in the condensed consolidated statements of earnings based on an amortization approach.