Due to the global nature of our operations, portions of the Company's revenues and operating expenses are recorded in currencies other than the U.S. dollar. Transactional exposure arises where transactions occur in currencies different to the functional currency of the relevant subsidiary. The main trading currencies of the Company are the U.S. dollar, Pounds Sterling, Swiss Franc, Canadian dollar, Japanese Yen and the Euro.

The value of revenues and operating expenses measured in U.S. dollars is therefore subject to changes in foreign currency exchange rates. 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 did not have credit risk related contingent features or collateral linked to the derivatives. 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 Sheet.

In connection with the acquisition of Baxalta the Company has assumed foreign currency forward contracts and elected to apply hedge accounting. These contracts have been designated as cash flow hedges and accordingly, to the extent effective, any unrealized gains or losses on these foreign currency forward contracts are reported in AOCI. Realized gains and losses for the effective portion of such contracts are recognized in revenue or cost of sales when the sale of product in the currency being hedged is recognized. To the extent ineffective, hedge transaction gains and losses are reported in Other income/(expense), net. The amount of ineffectiveness for the three and six months ended June 30, 2016 was immaterial.

At June 30, 2016 the foreign currency forward contracts had a total notional value of $519.0 million with a maximum duration of 12 months. The Company did not have any forward contracts that were designated as derivative instruments as of December 31, 2015. The portion of the fair value of these foreign currency forward contracts that was included in AOCI in total equity reflected net losses of $3.4 million as of June 30, 2016. The Company expects all contracts to be settled over the next 12 months and any amounts in AOCI to be reported as an adjustment to revenue or cost of sales. 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 June 30, 2016, credit risk did not change the fair value of the Company's foreign currency forward contracts.

The Company uses forward contracts to hedge earnings from the effects of foreign exchange relating to certain of the Company's intercompany and third-party receivables and payables denominated in a foreign currency. These derivative instruments generally are not formally designated as hedges, the terms of these instruments generally do not exceed three months and the change in fair value of these derivatives are reported in earnings. The notional amount of undesignated derivative instruments was $668.0 million and $625.5 million as of June 30, 2016 and 2015, respectively.

The Company also has option contracts assumed from Baxalta that were previously designated as cash flow hedges. The notional amount of these option contracts totaled $37.6 million as of June 30, 2016. Upon acquisition, the Company did not elect to redesignate these option contracts as cash flow hedges. In addition, the company also assumed undesignated forward contracts from Baxalta. The notional amount of these undesignated forward contracts totaled $249.3 million as of June 30, 2016.

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 existing debt obligations or anticipated issuances of debt. 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 assumed in connection with the acquisition of Baxalta. Interest on each of these debt obligations is set at fixed and/or floating rates, to the extent utilized. Shire's exposure under these debt obligations is to changes in U.S. dollar interest rates. For further details related to interest rates on the Company's various debt facilities, please see Note 13 Borrowings, of these Unaudited Consolidated Financial Statements.

In connection with the acquisition of Baxalta the Company assumed interest rate swap contracts on certain borrowing transactions. These interest rate swap contracts were related to the issuance of Baxalta's Senior Notes with an aggregate notional amount of $1.0 billion, mature in June 2020 and June 2025. Subsequent to the acquisition of Baxalta the Company redesignated these interest rate swap contracts as fair value hedges, based on their contractual terms, economic conditions, historic operating or accounting policies, and other conditions that existed at the acquisition date. The effective portion of the changes in the fair value of interest rate swap contracts are recorded as a component of the Senior Notes with immaterial net impact recorded in income. Any net interest payments made or received on the interest rate swap contracts are recognized as a component of interest expense in the Condensed Unaudited Consolidated Statements of Income. For further details related to Baxalta's Senior Notes, please see Note 13, Borrowings, of these Unaudited Consolidated Financial Statements. As of June 30, 2016 the fair value of these contracts was $55.6 million (2015: $nil) presented within Other non-current assets. For the six months ended June 30, 2016, the Company recognized $22.1 million (2015: $nil) of gain related to these contracts, which was recognized as a component of interest expense.

During the six months ended June 30, 2016, the Company entered into interest rate swap contracts with a total notional amount of $5.1 billion related to the November 2015 Facilities Agreement. The Company has not elected hedge accounting for these contracts. As of June 30, 2016 the fair value of these contracts was $4.6 million (2015: $nil) which is presented within other current liabilities. For the six months ended June 30, 2016, the Company recognized $4.6 million (2015: $nil) loss related to these contracts, which was recognized as a component of interest expense.

The following tables summarize the income statement locations and gains and losses on the Company's designated and undesignated derivative instruments for the six months ended June 30, 2016. There were no designated derivatives for the six months ended June 30, 2015.

As of June 30, 2016, the Company had in total 351 interest rate swap and foreign exchange contracts.


	Gain (loss) recognized in OCI		Income Statement location	Gain (loss) reclassified from AOCI into income
Six months to June 30,	2016	2015		2016	2015
	(in millions)			(in millions)
Designated Derivative Instruments

Cash flow hedges
Foreign exchange contracts	(3.4)	-	Cost of sales	-	-


	Location of gain (loss) in Income Statement			Gain (loss) recognized in income
Six months to June 30,				2016	2015
				(in millions)
Fair value hedges
Interest rate contracts	Interest expense			22.1	-

Undesignated Derivative Instruments

Foreign exchange contracts	Other income, net			(28.8)	21.3
Interest rate swap contracts	Interest expense			(4.6)	-

As of June 30, 2016, $2.3 million of deferred, net after-tax losses on derivative instruments included in AOCI are expected to be recognized in earnings during the next 12 months, coinciding with when the hedged items are expected to impact earnings.

The following table presents the classification and estimated fair value of the Company's derivative instruments as of June 30, 2016:

	Derivatives in asset positions		Derivatives in liability positions
(in millions)	Balance Sheet location	Fair Value	Balance Sheet location	Fair Value

Designated Derivative Instruments

Foreign exchange contracts	Other current assets	1.8	Accrued liabilities	9.3
Interest rate contracts	Other non-current assets	55.6		-

		57.4		9.3

Undesignated Derivative Instruments

Foreign exchange forward contracts	Prepaid and other current assets	7.9	Accrued liabilities	26.8
Interest rate swap contracts	Prepaid and other current assets	-	Accrued liabilities	4.6

		65.3		40.7

As of June 30, 2016, the potential effect of rights of set-off associated with the Interest rate swap and foreign exchange forward contracts would be an offset to both assets and liabilities of $11.1 million, resulting in net derivative assets and derivative liabilities of $54.2 million and $29.6 million, respectively.