Derivatives

The majority of the Company’s transactions are in U.S. dollars; however, some transactions are based in various foreign currencies. The Company purchases short-term, foreign exchange forward contracts to hedge the impact of foreign currency exchange fluctuations on certain underlying assets, liabilities and commitments for operating expenses and product costs denominated in foreign currencies. The purpose of entering into these hedging transactions is to minimize the impact of foreign currency fluctuations on the Company’s results of operations. These contract maturity dates do not exceed 12 months. All foreign exchange forward contracts are for risk management purposes only. The Company does not purchase foreign exchange forward contracts for speculative or trading purposes. As of March 31, 2017, the Company had outstanding foreign exchange forward contracts with commercial banks for British pound sterling, Euro, Japanese yen, Malaysian ringgit, Philippine peso, Singapore dollar and Thai baht, which were designated as either cash flow hedges or non-designated hedges.

If the derivative is designated as a cash flow hedge, the effective portion of the change in fair value of the derivative is initially deferred in AOCI, net of tax. These amounts are subsequently recognized into earnings when the underlying cash flow being hedged is recognized into earnings. Recognized gains and losses on foreign exchange forward contracts entered into for manufacturing-related activities are reported in cost of revenue and presented within cash flow from operations. Hedge effectiveness is measured by comparing the hedging instrument’s cumulative change in fair value from inception to maturity to the underlying exposure’s terminal value. The Company determined the ineffectiveness associated with its cash flow hedges to be immaterial to the condensed consolidated financial statements for the three and nine months ended March 31, 2017 and April 1, 2016.

A change in the fair value of non-designated hedges is recognized in earnings in the period incurred and is reported as a component of Other income (expense), net. The changes in fair value on these contracts were immaterial to the condensed consolidated financial statements during the three and nine months ended March 31, 2017 and April 1, 2016.

As of March 31, 2017, the amount of existing net losses related to cash flow hedges recorded in Accumulated other comprehensive income (loss) that are expected to be reclassified into earnings over the next twelve months was $21 million. In addition, as of March 31, 2017, the Company did not have any foreign exchange forward contracts with credit-risk-related contingent features.

See Note 4 to the condensed consolidated financial statements for additional disclosures related to the fair value of the Company’s foreign exchange forward contracts.

Derivative Instruments

The fair value and balance sheet location of the Company’s derivative instruments were as follows:



	Derivative Assets Reported in
	Other Current Assets				Other Non-current Assets
	March 31, 2017		July 1, 2016		March 31, 2017		July 1, 2016
	(in millions)
Foreign exchange forward contracts designated	$	4	$	114	$	—	$	—
Foreign exchange forward contracts not designated	12		12		—		—
Call options	1		70		—		1
Total derivatives	$	17	$	196	$	—	$	1



	Derivative Liabilities Reported in
	Accrued Expenses				Other Liabilities
	March 31, 2017		July 1, 2016		March 31, 2017		July 1, 2016
	(in millions)
Foreign exchange forward contracts designated	$	—	$	23	$	—	$	—
Foreign exchange forward contracts not designated	100		—		—		—
Exchange option	1		141		1		14
Total derivatives	$	101	$	164	$	1	$	14

Netting Arrangements

Under certain provisions and conditions within agreements with counterparties to the Company’s foreign exchange forward contracts, subject to applicable requirements, the Company has the right of set-off associated with the Company’s foreign exchange forward contracts and is allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. As of March 31, 2017, the Company did not offset or net the fair value amounts of derivative instruments in its condensed consolidated balance sheets and separately disclosed the gross fair value amounts of the derivative instruments as either assets or liabilities. As of March 31, 2017, the potential effect of rights of set-off associated with the Company’s foreign exchange forward contracts would result in a net derivative asset balance of $4 million and a net derivative liability balance of $88 million. As of July 1, 2016, the effect of rights of set-off was not material.

Effect of Foreign Exchange Forward Contracts on the Condensed Consolidated Statements of Operations

The impact of foreign exchange forward contracts on the condensed consolidated financial statements was as follows:



	Three Months Ended
Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Derivatives				Amount of Gain (Loss) Reclassified from AOCI into Earnings
Derivatives in Cash Flow Hedging Relationships	March 31, 2017		April 1, 2016		March 31, 2017		April 1, 2016
	(in millions)
Foreign exchange forward contracts	$	50	$	31	$	5	$	(8	)



	Nine Months Ended
Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Derivatives						Amount of Gain (Loss) Reclassified from AOCI into Earnings
Derivatives in Cash Flow Hedging Relationships	March 31, 2017			April 1, 2016			March 31, 2017		April 1, 2016
	(in millions)
Foreign exchange forward contracts	$	(48	)	$	(9	)	$	47	$	(61	)

The total net realized transaction and foreign exchange forward contract currency gains and losses were not material to the condensed consolidated financial statements for the three and nine months ended March 31, 2017 and April 1, 2016.