In the normal course of business, we manage these risks through a variety of strategies, including the use of derivatives. Certain derivatives are designated as either cash flow or fair value hedges and qualify for hedge accounting treatment, while others do not qualify and are marked to market through earnings. Ineffectiveness of our hedges is not material. We do not use derivative instruments for trading or speculative purposes. We perform assessments of our counterparty credit risk regularly, including a review of credit ratings, credit default swap rates and potential nonperformance of the counterparty. Based on our most recent assessment of our counterparty credit risk, we consider this risk to be low. In addition, we enter into derivative contracts with a variety of financial institutions that we believe are creditworthy in order to reduce our concentration of credit risk.

We are subject to commodity price risk because our ability to recover increased costs through higher pricing may be limited in the competitive environment in which we operate. This risk is managed through the use of fixed-price purchase orders, pricing agreements, geographic diversity and derivatives. We use derivatives, primarily with terms of no more than three years, to economically hedge price fluctuations related to a portion of our anticipated commodity purchases, primarily for aluminum, fuel and natural gas. For those derivatives that qualify for hedge accounting, any ineffectiveness is recorded immediately in corporate unallocated expenses. We classify both the earnings and cash flow impact from these derivatives consistent with the underlying hedged item. During the next 12 months, we expect to reclassify net gains of $2 million related to these hedges from accumulated other comprehensive loss into net income. Derivatives used to hedge commodity price risk that do not qualify for hedge accounting are marked to market each period and reflected in our income statement.

Our open commodity derivative contracts that qualify for hedge accounting had a face value of $586 million as of September 3, 2011 and $577 million as of September 4, 2010. These contracts resulted in net unrealized gains of $11 million as of September 3, 2011 and $7 million as of September 4, 2010.

Our open commodity derivative contracts that do not qualify for hedge accounting had a face value of $537 million as of September 3, 2011 and $254 million as of September 4, 2010. These contracts resulted in net losses of $6 million as of September 3, 2011 and $3 million as of September 4, 2010.

Financial statements of foreign subsidiaries are translated into U.S. dollars using period-end exchange rates for assets and liabilities and weighted-average exchange rates for revenues and expenses. Adjustments resulting from translating net assets are reported as a separate component of accumulated other comprehensive loss within common shareholders' equity as currency translation adjustment.

We may enter into derivatives, primarily forward contracts with terms of no more than two years, to manage our exposure to foreign currency transaction risk. Exchange rate gains or losses related to foreign currency transactions are recognized as transaction gains or losses in our income statement as incurred.

Our foreign currency derivatives had a total face value of $2.5 billion as of September 3, 2011 and $1.4 billion as of September 4, 2010. The contracts that qualify for hedge accounting resulted in net unrealized losses of $11 million as of September 3, 2011 and $5 million as of September 4, 2010. During the next 12 months, we expect to reclassify net losses of $10 million related to these hedges from accumulated other comprehensive loss into net income. The contracts that do not qualify for hedge accounting resulted in net losses of $14 million as of September 3, 2011 and a net gain of $1 million as of September 4, 2010. All losses and gains were offset by changes in the underlying hedged items, resulting in no net material impact on earnings.

We centrally manage our debt and investment portfolios considering investment opportunities and risks, tax consequences and overall financing strategies. We use various interest rate derivative instruments including, but not limited to, interest rate swaps, cross currency interest rate swaps, Treasury locks and swap locks to manage our overall interest expense and foreign exchange risk. These instruments effectively change the interest rate and currency of specific debt issuances. Certain of our fixed rate indebtedness has been swapped to floating rates. The notional amount, interest payment and maturity date of the interest rate and cross-currency swaps match the principal, interest payment and maturity date of the related debt. Our Treasury locks and swap locks are entered into to protect against unfavorable interest rate changes relating to forecasted debt transactions.

The notional amounts of the interest rate derivative instruments outstanding as of September 3, 2011 and September 4, 2010 were $8.9 billion and $9.2 billion, respectively. For those interest rate derivative instruments that qualify for cash flow hedge accounting, any ineffectiveness is recorded immediately. We classify both the earnings and cash flow impact from these interest rate derivative instruments consistent with the underlying hedged item. During the next 12 months, we expect to reclassify net losses of $16 million related to these hedges from accumulated other comprehensive loss into net income.

As of September 3, 2011, approximately 40% of total debt, after the impact of the related interest rate derivative instruments, was exposed to variable rates, compared to 43% as of December 25, 2010.

The fair values of our financial assets and liabilities as of September 3, 2011 and September 4, 2010 are categorized as follows:


	2011				2010
	Assets^(a)		Liabilities^(a)		Assets^(a)		Liabilities^(a)
Available-for-sale securities^(b)	$	61	$	–	$	88	$	–
Short-term investments – index funds^(c)	$	159	$	–	$	147	$	–
Deferred compensation^(d)	$	–	$	519	$	–	$	553

Derivatives designated as hedging instruments:
Forward exchange contracts^(e)	$	12	$	23	$	19	$	24
Interest rate derivatives^(f)		428		56		402		91
Commodity contracts – other^(g)		27		16		45		12
Commodity contracts – futures^(h)		1		1		1		27

	$	468	$	96	$	467	$	154

Derivatives not designated as hedging instruments:
Forward exchange contracts^(e)	$	5	$	19	$	6	$	5
Interest rate derivatives^(f)		104		140		56		97
Commodity contracts – other^(g)		24		29		6		8
Commodity contracts – futures^(h)		–		1		–		1
Prepaid forward contracts⁽ⁱ⁾		38		–		48		–

	$	171	$	189	$	116	$	111

Total derivatives at fair value	$	639	$	285	$	583	$	265

Total	$	859	$	804	$	818	$	818

^(a)

Financial assets are classified on our balance sheet within other assets, with the exception of short-term investments. Financial liabilities are classified on our balance sheet within other current liabilities and other liabilities. Unless specifically indicated, all financial assets and liabilities are categorized as Level 2 assets or liabilities.

^(b)	Based on the price of common stock. Categorized as a Level 1 asset.

^(c)	Based on price changes in index funds used to manage a portion of market risk arising from our deferred compensation liability. Categorized as a Level 1 asset.

^(d)	Based on the fair value of investments corresponding to employees' investment elections. As of September 3, 2011 and September 4, 2010, $43 million and $147 million, respectively, are categorized as Level 1 liabilities. The remaining balances are categorized as Level 2 liabilities.

^(e)	Based on observable market transactions of spot and forward rates.

^(f)	Based on LIBOR and recently reported transactions in the marketplace.

^(g)	Based on recently reported transactions in the marketplace, primarily swap arrangements.

^(h)	Based on average prices on futures exchanges. Categorized as a Level 1 asset or liability.

⁽ⁱ⁾	Based primarily on the price of our common stock.

The fair value of our debt obligations as of September 3, 2011 was $29.4 billion, based upon prices of similar instruments in the marketplace.

The effective portion of the pre-tax losses/(gains) on our derivative instruments are categorized in the tables below.


	12 Weeks Ended
	Fair Value/Non- designated Hedges						Cash Flow Hedges
	Losses/(Gains) Recognized in Income Statement^(a)						(Gains)/Losses Recognized in Accumulated Other Comprehensive Loss							Losses/(Gains) Reclassified from Accumulated Other Comprehensive Loss into Income Statement^(b)
		9/3/11			9/4/10		9/3/11					9/4/10			9/3/11			9/4/10

Forward exchange contracts	$	7		$	5		$(9)				$	17		$	9		$	10
Interest rate derivatives		(84	)		(135	)	42					62			4			–
Prepaid forward contracts		3			(2	)	–					–			–			–
Commodity contracts		29			(15	)	40					(32	)		(12	)		12

Total	$	(45	)	$	(147	)	$73				$	47		$	1		$	22


	36 Weeks Ended
	Fair Value/Non- designated Hedges							Cash Flow Hedges
	Losses/(Gains) Recognized in Income Statement^(a)							Losses/(Gains) Recognized in Accumulated Other Comprehensive Loss						Losses/(Gains) Reclassified from Accumulated Other Comprehensive Loss into Income Statement^(b)
		9/3/11			9/4/10				9/3/11			9/4/10			9/3/11			9/4/10

Forward exchange contracts	$	8			$–			$	28		$	9		$	30		$	32
Interest rate derivatives		(162	)		(195)				71			98			10			–
Prepaid forward contracts		1			(4)				–			–			–			–
Commodity contracts		(17	)		(58)				(15	)		26			(37	)		28

Total	$	(170	)		$(257)			$	84		$	133		$	3		$	60

^(a)	Interest rate gains/losses are included in interest expense in our income statement. All other gains/losses are included in corporate unallocated expenses.

^(b)	Interest rate losses are included in interest expense in our income statement. All other gains/losses are included in cost of sales in our income statement.