Financial Instruments

Foreign Currency Contracts

Due to the global nature of its operations, portions of the Company's revenues and operating expenses are recorded in currencies other than the U.S. dollar. The value of revenues and operating expenses measured in U.S. dollars is therefore subject to changes in foreign currency exchange rates. The main trading currencies of the Company are the U.S. dollar, Euro, British pound sterling, Swiss franc, Canadian dollar, and Japanese yen.

Transactional exposure arises where transactions occur in currencies different to the functional currency of the relevant subsidiary. It is the Company’s policy that these exposures are minimized to the extent practicable by denominating transactions in the subsidiary’s functional currency. Where significant exposures remain, the Company uses foreign exchange contracts (spot, forward, and swap contracts) to manage the exposure for balance sheet assets and liabilities that are denominated in currencies different to the functional currency of the relevant subsidiary.

The Company has master netting agreements with a number of counterparties to these foreign exchange contracts and on the occurrence of specified events, the Company has the ability to terminate contracts and settle them with a net payment by one party to the other. The Company has elected to present derivative assets and derivative liabilities on a gross basis in the Unaudited Consolidated Balance Sheets. The Company does not have credit risk related contingent features or collateral linked to the derivatives.

Undesignated Foreign Currency Derivatives

The Company uses forward contracts to mitigate the foreign currency risk related to certain balance sheet positions, including intercompany and third-party receivables and payables. The Company has not elected hedge accounting for these derivative instruments as the duration of these contracts is typically three months or less. The changes in fair value of these derivatives are reported in earnings.

The table below presents the notional amount, maximum duration, and fair value for the undesignated foreign currency derivatives:



(In millions, except duration)	March 31, 2018			December 31, 2017
Notional amount	$	2,452.9		$	1,672.3
Maximum duration (in months)	3 months			3 months
Fair value - net (liability)/asset	$	(1.7	)	$	11.4

The Company considers the impact of its and its counterparties’ credit risk on the fair value of the contracts as well as the ability of each party to execute its contractual obligations. As of March 31, 2018, credit risk did not materially change the fair value of the Company’s foreign currency contracts.

Interest Rate Contracts

The Company is exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in benchmark interest rates relating to its debt obligations on which interest is set at floating rates. The Company’s policy is to manage this risk to an acceptable level. The Company is principally exposed to interest rate risk on any borrowings under the Company’s various debt facilities and on part of the senior notes assumed in connection with the acquisition of Baxalta. Interest on each of these debt obligations is set at floating rates, to the extent utilized. Shire’s exposure under these facilities is to changes in U.S. dollar interest rates. For further details related to interest rates on the Company’s various debt facilities, refer to Note 13, Borrowings and Capital Leases, to these Unaudited Consolidated Financial Statements.

Designated Interest Rate Derivatives

The Company has elected hedge accounting for interest rate swap contracts designated as fair value hedges. The effective portion of the changes in the fair value of interest rate swap contracts are recorded as a component of the underlying Baxalta Notes with the ineffective portion recorded in Interest expense. Any net interest payments made or received on the interest rate swap contracts are recognized as a component of Interest expense in the Unaudited Consolidated Statements of Operations.

The table below presents the notional amount, maturity, and fair value for the designated interest rate derivatives:



(In millions, except maturity)	March 31, 2018			December 31, 2017
Notional amount	$	1,000.0		$	1,000.0
Maturity	June 2020 and June 2025			June 2020 and June 2025
Fair value - net liability	$	(25.3	)	$	(7.7	)

Summary of Derivatives

The following tables summarize the effect of the derivative instruments on the Company's Unaudited Consolidated Statements of Operations:



(In millions)	Gain/(loss) recognized in OCI					Location	Gain reclassified from AOCI into income
Three months ended March 31,	2018		2017				2018		2017
Designated derivative instruments
Designated cash flow hedges
Foreign exchange contracts	$	—	$	(0.6	)	Cost of sales	$	—	$	6.6



(In millions)	Location	Gain/(loss) recognized in income
Three months ended March 31,		2018			2017
Fair value hedges
Interest rate contracts, net	Interest expense	$	(2.6	)	$	(1.2	)
Undesignated derivative instruments
Foreign exchange contracts	Other income/(expense), net	8.6			(15.3		)

Summary of Derivatives

The following table presents the classification and estimated fair value of derivative instruments on the Company's Unaudited Consolidated Balance Sheets:



	Asset position							Liability position
		Fair value							Fair value
(In millions)	Location	March 31, 2018			December 31, 2017			Location	March 31, 2018			December 31, 2017
Designated derivative Instruments
Interest rate contracts	Long term borrowings	$	—		$	—		Long term borrowings	$	25.3		$	7.7
		$	—		$	—			$	25.3		$	7.7
Undesignated derivative instruments
Foreign exchange contracts	Prepaid expenses and other current assets	$	17.3		$	17.9		Other current liabilities	$	19.0		$	6.5
Total derivative fair value		$	17.3		$	17.9			$	44.3		$	14.2
Potential effect of rights to offset		(6.1		)	(2.7		)		(6.1		)	(2.7		)
Net derivative		$	11.2		$	15.2			$	38.2		$	11.5