We operate on a global basis and are exposed to the risk that our earnings, cash flows and equity could be adversely impacted by fluctuations in foreign exchange and interest rates. Our hedging policy attempts to manage these risks to an acceptable level based on our judgment of the appropriate trade-off between risk, opportunity and costs.

We are primarily exposed to foreign exchange risk with respect to recognized assets and liabilities, forecasted transactions and net assets denominated in the Euro, British Pound, Chinese Yuan, Korean Won, Australian Dollar, Canadian Dollar, Japanese Yen, Colombian Peso, Brazilian Real, Mexican Peso, Indian Rupee and Swedish Krona. We manage our foreign currency exposures on a consolidated basis, which allows us to net exposures and take advantage of any natural offsets. In addition, we use derivative and nonderivative instruments to further reduce the net exposure to foreign exchange risk. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and equity volatility resulting from changes in foreign exchange rates. Financial market and currency volatility may limit our ability to cost-effectively hedge these exposures.

We are also exposed to the risk that our earnings and cash flows could be adversely impacted by fluctuations in interest rates. Our policy is to manage interest costs using a mix of fixed- and floating-rate debt that we believe is appropriate. To manage this mix in a cost-efficient manner, we periodically enter into interest rate swaps in which we agree to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount.

All derivative instruments are recognized as either assets or liabilities at fair value in the condensed consolidated balance sheets and are classified as short-term or long-term based on the scheduled maturity of the instrument. We designate certain of our derivatives and foreign-currency denominated debt as hedging instruments in cash flow, fair value, or net investment hedges.

We may use options, including collars and purchased options, forwards and cross-currency swaps to hedge the foreign exchange risk to earnings relating to forecasted transactions and recognized assets and liabilities. We periodically use treasury rate locks to hedge the risk to earnings associated with movements in interest rates relating to anticipated issuances of debt.

For each derivative instrument that is designated and effective as a cash flow hedge, the gain or loss on the derivative is recorded in AOCI and then recognized in earnings consistent with the underlying hedged item. Option premiums or net premiums paid are initially recorded as assets and reclassified to other comprehensive income (OCI) over the life of the option, and then recognized in earnings consistent with the underlying hedged item. Cash flow hedges are classified in cost of sales and interest expense, net, and are primarily related to forecasted third-party sales denominated in foreign currencies, forecasted intra-company sales denominated in foreign currencies, and anticipated issuances of debt, respectively.

The notional amounts of foreign exchange contracts designated as cash flow hedges were $334 million and $617 million as of September 30, 2020 and December 31, 2019, respectively. The maximum term over which we have cash flow hedge contracts in place related to forecasted transactions at September 30, 2020 is 12 months for foreign exchange contracts. The total notional amounts of interest rate contracts designated as cash flow hedges were $500 million and $550 million as of September 30, 2020 and December 31, 2019, respectively. The interest rate contracts have maturity dates in 2022 and hedge the variability in future benchmark interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt.

We periodically use interest rate swaps to convert a portion of our fixed-rate debt into variable-rate debt. These instruments hedge our earnings from changes in the fair value of debt due to fluctuations in the designated benchmark interest rate. For each derivative instrument that is designated and effective as a fair value hedge, the gain or loss on the derivative is recognized immediately to earnings, and offsets changes in fair value attributable to a particular risk, such as changes in interest rates, of the hedged item, which are also recognized in earnings. Fair value hedges are classified in interest expense, net, as they hedge the interest rate risk associated with certain of our fixed-rate debt.

In May 2017, we issued €600 million of senior notes due May 2025. In May 2019, we issued €750 million of senior notes due May 2024 and €750 million of senior notes due May 2029. We have designated these debt obligations as hedges of our net investment in our European operations and, as a result, mark to spot rate adjustments on the outstanding debt balances are recorded as a component of AOCI. As of September 30, 2020, we had an accumulated pre-tax unrealized translation loss in AOCI of $125 million related to the Euro-denominated senior notes.

In May 2019, we entered into forward contracts designated as net investment hedges to reduce exposure to changes in currency rates on €1.2 billion of our net investment in our European operations. Those hedges were entered into in advance of the issuance of our senior notes mentioned above, were settled in the second quarter of 2019 and resulted in an insignificant loss.

If it is determined that a derivative or nonderivative hedging instrument is no longer highly effective as a hedge, we discontinue hedge accounting prospectively. Gains or losses relating to terminations of effective cash flow hedges generally continue to be deferred and are recognized consistent with the loss or income recognition of the underlying hedged items. However, if it is probable that the hedged forecasted transactions will not occur, any gains or losses would be immediately reclassified from AOCI to earnings. In the third quarter of 2020, we terminated an interest rate contract with a notional amount of $50 million for a $7 million cash payment. In October 2020, we terminated additional interest rate contracts with a notional balance of $350 million and a liability fair value of $109 million as of September 30, 2020 for $100 million in cash payments. The losses relating to these terminations continue to be deferred and will be recognized consistent with the underlying hedged item, interest expense on the future issuance of debt.

If we terminate a fair value hedge, an amount equal to the cumulative fair value adjustment to the hedged item at the date of termination is amortized to earnings over the remaining term of the hedged item. There were no fair value hedges terminated during the first nine months of 2020 or 2019.

If we remove a net investment hedge designation, any gains or losses recognized in AOCI are not reclassified to earnings until we sell, liquidate, or deconsolidate the foreign investments that were being hedged. In the second quarter of 2019, we dedesignated €1.2 billion of forward contracts designated as a net investment hedge of our European operations. There were no net investment hedges terminated during the first nine months of 2020.

We use forward contracts to hedge earnings from the effects of foreign exchange relating to certain of our intra-company and third-party receivables and payables denominated in a foreign currency. These derivative instruments are generally not formally designated as hedges and the terms of these instruments generally do not exceed one month.

The following tables summarize the gains and losses on our hedging instruments and the classification of those gains and losses within our condensed consolidated financial statements for the three months ended September 30, 2020 and 2019.


	Gain (loss) recognized in OCI				Location of gain (loss) in income statement	Gain (loss) reclassified from AOCI into income
(in millions)	2020		2019			2020		2019
Cash flow hedges
Interest rate contracts	$	31	$	(57)	Interest expense, net	$	—	$	—
Foreign exchange contracts	(6)		4		Cost of sales	(2)		2
Net investment hedges	(103)		96		Other (income) expense, net	—		—
Total	$	(78)	$	43		$	(2)	$	2


	Gain (loss) recognized in OCI				Location of gain (loss) in income statement	Gain (loss) reclassified from AOCI into income
(in millions)	2020		2019			2020		2019
Cash flow hedges
Interest rate contracts	$	(144)	$	(91)	Interest expense, net	$	—	$	—
Foreign exchange contracts	1		4		Cost of sales	2		3
Net investment hedges	(104)		74		Other (income) expense, net	—		—
Total	$	(247)	$	(13)		$	2	$	3

As of September 30, 2020, $7 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.


	Derivatives in asset positions			Derivatives in liability positions
(in millions)	Balance sheet location	Fair value		Balance sheet location	Fair value
Derivative instruments designated as hedges
Interest rate contracts	Other non-current assets	$	—	Other non-current liabilities	$	179
Foreign exchange contracts	Prepaid expenses and other current assets	3		Accounts payable and accrued liabilities	3

Total derivative instruments designated as hedges		3			182
Undesignated derivative instruments
Foreign exchange contracts	Prepaid expenses and other current assets	12		Accounts payable and accrued liabilities	9
Total derivative instruments		$	15		$	191


	Derivatives in asset positions			Derivatives in liability positions
(in millions)	Balance sheet location	Fair value		Balance sheet location	Fair value
Derivative instruments designated as hedges
Interest rate contracts	Other non-current assets	$	10	Other non-current liabilities	$	52
Foreign exchange contracts	Prepaid expenses and other current assets	10		Accounts payable and accrued liabilities	—

Total derivative instruments designated as hedges		20			52
Undesignated derivative instruments
Foreign exchange contracts	Prepaid expenses and other current assets	1		Accounts payable and accrued liabilities	2
Total derivative instruments		$	21		$	54

While some of our derivatives are subject to master netting arrangements, we present our assets and liabilities related to derivative instruments on a gross basis within the condensed consolidated balance sheets. Additionally, we are not required to post collateral for any of our outstanding derivatives.


	September 30, 2020				December 31, 2019
(in millions)	Asset		Liability		Asset		Liability
Gross amounts recognized in the consolidated balance sheet	$	15	$	191	$	21	$	54
Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet	(5)		(5)		(11)		(11)
Total	$	10	$	186	$	10	$	43


	Carrying amount of hedged item				Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged item (a)
(in millions)	Balance as of September 30, 2020		Balance as of December 31, 2019		Balance as of September 30, 2020		Balance as of December 31, 2019
Long-term debt	$	102	$	103	$	5	$	6