Financial Instruments

Cash Equivalents and Available-for-Sale Investments

Cash equivalents and available-for-sale investments were as follows:



	As of January 31, 2017									As of October 31, 2016
	Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value		Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
	In millions
Cash Equivalents:
Time deposits	$	3,651	$	—	$	—		$	3,651	$	4,074	$	—	$	—		$	4,074
Money market funds	3,069		—		—			3,069		6,549		—		—			6,549
Total cash equivalents	6,720		—		—			6,720		10,623		—		—			10,623
Available-for-Sale Investments:
Debt securities:
Time deposits	11		—		—			11		11		—		—			11
Foreign bonds	219		52		—			271		218		69		—			287
Other debt securities	47		—		(12		)	35		47		—		(12		)	35
Total debt securities	277		52		(12		)	317		276		69		(12		)	333
Equity securities:
Equity securities in public companies	22		—		—			22		21		—		(4		)	17
Total equity securities	22		—		—			22		21		—		(4		)	17
Total available-for-sale investments	299		52		(12		)	339		297		69		(16		)	350
Total cash equivalents and available-for-sale investments	$	7,019	$	52	$	(12	)	$	7,059	$	10,920	$	69	$	(16	)	$	10,973

All highly liquid investments with original maturities of three months or less at the date of acquisition are considered cash equivalents. As of January 31, 2017 and October 31, 2016, the carrying amount of cash equivalents approximated fair value due to the short period of time to maturity. Time deposits were primarily issued by institutions outside the U.S. as of January 31, 2017 and October 31, 2016. The estimated fair value of the available-for-sale investments may not be representative of values that will be realized in the future.

The gross unrealized loss as of January 31, 2017 and October 31, 2016 was due primarily to a decline in the fair value of a debt security of $12 million for both periods, which has been in a continuous loss position for more than twelve months. The Company does not intend to sell this debt security, and it is not likely that the Company will be required to sell this debt security prior to the recovery of the amortized cost.

Contractual maturities of investments in available-for-sale debt securities were as follows:



	January 31, 2017
	Amortized Cost		Fair Value
	In millions
Due in more than five years	$	277	$	317

Equity securities in privately held companies that are accounted for as cost basis investments are included in Long-term financing receivables and other assets in the Condensed Consolidated Balance Sheets. These investments amounted to $129 million and $128 million at January 31, 2017 and October 31, 2016, respectively.

Investments in equity securities that are accounted for using the equity method are included in Investments in equity interests in the Condensed Consolidated Balance Sheets. These investments amounted to $2.6 billion at both January 31, 2017 and October 31, 2016. For further details, see Note 19, "Equity Method Investments".

Derivative Instruments

Hewlett Packard Enterprise is a global company exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of its business. As part of its risk management strategy, the Company uses derivative instruments, primarily forward contracts, interest rate swaps and total return swaps to hedge certain foreign currency, interest rate and, to a lesser extent, equity exposures. The Company's objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting the fair value of assets and liabilities. The Company does not have any leveraged derivatives and does not use derivative contracts for speculative purposes. The Company may designate its derivative contracts as fair value hedges, cash flow hedges or hedges of the foreign currency exposure of a net investment in a foreign operation ("net investment hedges"). Additionally, for derivatives not designated as hedging instruments, the Company categorizes those economic hedges as other derivatives. Derivative instruments directly attributable to the Company are recognized at fair value in the Condensed Consolidated Balance Sheets. The change in fair value of the derivative instruments is recognized in the Condensed Consolidated Statements of Earnings or Condensed Consolidated Statements of Comprehensive Income depending upon the type of hedge, as further discussed below. The Company classifies cash flows from its derivative programs with the activities that correspond to the underlying hedged items in the Condensed Consolidated Statements of Cash Flows.

As a result of its use of derivative instruments, the Company is exposed to the risk that its counterparties will fail to meet their contractual obligations. To mitigate counterparty credit risk, the Company has a policy of only entering into derivative contracts with carefully selected major financial institutions based on their credit ratings and other factors, and the Company maintains dollar risk limits that correspond to each financial institution's credit rating and other factors. The Company's established policies and procedures for mitigating credit risk include reviewing and establishing limits for credit exposure and periodically reassessing the creditworthiness of its counterparties. Master netting agreements also mitigate credit exposure to counterparties by permitting the Company to net amounts due from the Company to a counterparty against amounts due to the Company from the same counterparty under certain conditions.

To further mitigate credit exposure to counterparties, the Company has collateral security agreements, which allow the Company to hold collateral from, or require the Company to post collateral to, counterparties when aggregate derivative fair values exceed contractually established thresholds which are generally based on the credit ratings of the Company and its counterparties. If the Company's credit rating falls below a specified credit rating, the counterparty has the right to request full collateralization of the derivatives' net liability position. Conversely, if the counterparty's credit rating falls below a specified credit rating, the Company has the right to request full collateralization of the derivatives' net liability position. Collateral is generally posted within two business days. The fair value of the Company's derivatives, with credit contingent features, in a net liability position was $135 million and $9 million at January 31, 2017 and October 31, 2016, respectively, all of which were fully collateralized within two business days.

Under the Company's derivative contracts, the counterparty can terminate all outstanding trades following a covered change of control event affecting the Company that results in the surviving entity being rated below a specified credit rating. This credit contingent provision did not affect the Company's financial position or cash flows as of January 31, 2017 and October 31, 2016.

Fair Value Hedges

The Company issues long-term debt in U.S. dollars based on market conditions at the time of financing. The Company may enter into fair value hedges, such as interest rate swaps, to reduce the exposure of its debt portfolio to changes in fair value resulting from changes in interest rates by achieving a primarily U.S. dollar LIBOR-based floating interest rate. The swap transactions generally involve principal and interest obligations for U.S. dollar-denominated amounts. Alternatively, the Company may choose not to swap fixed for floating interest payments or may terminate a previously executed swap if it believes a larger proportion of fixed-rate debt would be beneficial. When investing in fixed-rate instruments, the Company may enter into interest rate swaps that convert the fixed interest payments into variable interest payments and may designate these swaps as fair value hedges.

For derivative instruments that are designated and qualify as fair value hedges, the Company recognizes the change in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Interest and other, net in the Condensed Consolidated Statements of Earnings in the period of change.

Cash Flow Hedges

The Company uses forward contracts designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted net revenue and, to a lesser extent, cost of sales, operating expenses, and intercompany loans denominated in currencies other than the U.S. dollar. The Company's foreign currency cash flow hedges mature generally within twelve months; however, forward contracts associated with sales-type and direct-financing leases and intercompany loans extend for the duration of the lease or loan term, which typically range from two to five years.

For derivative instruments that are designated and qualify as cash flow hedges, the Company initially records changes in fair value for the effective portion of the derivative instrument in Accumulated other comprehensive loss as a separate component of equity in the Condensed Consolidated Balance Sheets and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in earnings. The Company reports the effective portion of its cash flow hedges in the same financial statement line item as changes in the fair value of the hedged item.

Net Investment Hedges

The Company uses forward contracts designated as net investment hedges to hedge net investments in certain foreign subsidiaries whose functional currency is the local currency. The Company records the effective portion of such derivative instruments together with changes in the fair value of the hedged items in Cumulative translation adjustment as a separate component of Equity in the Condensed Consolidated Balance Sheets.

Other Derivatives

Other derivatives not designated as hedging instruments consist primarily of forward contracts used to hedge foreign currency-denominated balance sheet exposures. The Company also uses total return swaps and, to a lesser extent, interest rate swaps, based on equity or fixed income indices, to hedge its executive deferred compensation plan liability.

For derivative instruments not designated as hedging instruments, the Company recognizes changes in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Interest and other, net in the Condensed Consolidated Statements of Earnings in the period of change.

Hedge Effectiveness

For interest rate swaps designated as fair value hedges, the Company measures hedge effectiveness by offsetting the change in fair value of the hedged items with the change in fair value of the derivative. For forward contracts designated as cash flow or net investment hedges, the Company measures hedge effectiveness by comparing the cumulative change in fair value of the hedge contract with the cumulative change in fair value of the hedged item, both of which are based on forward rates. The Company recognizes any ineffective portion of the hedge in the Condensed Consolidated Statements of Earnings in the same period in which ineffectiveness occurs. Amounts excluded from the assessment of effectiveness are recognized in the Condensed Consolidated Statements of Earnings in the period they arise.

Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheets

The gross notional and fair value of derivative instruments in the Condensed Consolidated Balance Sheets were as follows:



	As of January 31, 2017										As of October 31, 2016
			Fair Value										Fair Value
	Outstanding Gross Notional		Other Current Assets		Long-Term Financing Receivables and Other Assets		Other Accrued Liabilities		Long-Term Other Liabilities		Outstanding Gross Notional		Other Current Assets		Long-Term Financing Receivables and Other Assets		Other Accrued Liabilities		Long-Term Other Liabilities
	In millions
Derivatives designated as hedging instruments
Fair value hedges:
Interest rate contracts	$	9,500	$	—	$	—	$	—	$	159	$	9,500	$	—	$	109	$	—	$	6
Cash flow hedges:
Foreign currency contracts	6,716		242		149		32		20		7,255		296		172		40		15
Net investment hedges:
Foreign currency contracts	1,929		43		21		17		38		1,891		53		28		23		28
Total derivatives designated as hedging instruments	18,145		285		170		49		217		18,646		349		309		63		49
Derivatives not designated as hedging instruments
Foreign currency contracts	11,801		90		5		123		8		16,496		100		11		103		11
Other derivatives	160		1		—		—		—		158		—		—		2		—
Total derivatives not designated as hedging instruments	11,961		91		5		123		8		16,654		100		11		105		11
Total derivatives	$	30,106	$	376	$	175	$	172	$	225	$	35,300	$	449	$	320	$	168	$	60

Offsetting of Derivative Instruments

The Company recognizes all derivative instruments on a gross basis in the Condensed Consolidated Balance Sheets. The Company's derivative instruments are subject to master netting arrangements and collateral security arrangements. The Company does not offset the fair value of its derivative instruments against the fair value of cash collateral posted under collateral security agreements. As of January 31, 2017 and October 31, 2016, information related to the potential effect of the Company's use of the master netting agreements and collateral security agreements was as follows:



	As of January 31, 2017
	In the Condensed Consolidated Balance Sheets
	(i)		(ii)		(iii) = (i)–(ii)		(iv)		(v)			(vi) = (iii)–(iv)–(v)
							Gross Amounts Not Offset
	Gross Amount Recognized		Gross Amount Offset		Net Amount Presented		Derivatives		Financial Collateral			Net Amount
	In millions
Derivative assets	$	551	$	—	$	551	$	260	$	260	⁽¹⁾	$	31
Derivative liabilities	$	397	$	—	$	397	$	260	$	48	⁽²⁾	$	89



	As of October 31, 2016
	In the Condensed Consolidated Balance Sheets
	(i)		(ii)		(iii) = (i)–(ii)		(iv)		(v)			(vi) = (iii)–(iv)–(v)
							Gross Amounts Not Offset
	Gross Amount Recognized		Gross Amount Offset		Net Amount Presented		Derivatives		Financial Collateral			Net Amount
	In millions
Derivative assets	$	769	$	—	$	769	$	214	$	465	⁽¹⁾	$	90
Derivative liabilities	$	228	$	—	$	228	$	214	$	10	⁽²⁾	$	4


(1)	Represents the cash collateral posted by counterparties as of the respective reporting date for the Company's asset position, net of derivative amounts that could be offset, as of, generally, two business days prior to the respective reporting date.


(2)	Represents the collateral posted by the Company through re-use of counterparty cash collateral as of the respective reporting date for the Company's liability position, net of derivative amounts that could be offset, as of, generally, two business days prior to the respective reporting date.

Effect of Derivative Instruments on the Condensed Consolidated Statements of Earnings

The pre-tax effect of derivative instruments and related hedged items in a fair value hedging relationship for the three months ended January 31, 2017 and 2016 were as follows:

Gains (Losses) Recognized in Earnings on Derivative and Related Hedged Item

Derivative Instrument

Location

Three months ended January 31, 2017

Hedged Item

Location

Three months ended January 31, 2017

In millions

Interest rate contracts

Interest and other, net

(262

)

Fixed-rate debt

Interest and other, net

262

Gains (Losses) Recognized in Earnings on Derivative and Related Hedged Item

Derivative Instrument

Location

Three months ended January 31, 2016

Hedged Item

Location

Three months ended January 31, 2016

In millions

Interest rate contracts

Interest and other, net

133

Fixed-rate debt

Interest and other, net

(133

)

The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three months ended January 31, 2017 were as follows:



	Gains (Losses) Recognized in Other Comprehensive Income ("OCI") on Derivatives (Effective Portion)			Gains (Losses) Reclassified from Accumulated OCI Into Earnings (Effective Portion)
	Three months ended January 31, 2017			Location	Three months ended January 31, 2017
	In millions				In millions
Cash flow hedges:
Foreign currency contracts	$	60		Net revenue	$	79
Foreign currency contracts	—			Cost of products	1
Foreign currency contracts	76			Interest and other, net	83
Total cash flow hedges	$	136			$	163
Net investment hedges:
Foreign currency contracts	$	(2	)	Interest and other, net	$	—

The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three months ended January 31, 2016 was as follows:



	Gains (Losses) Recognized in Other Comprehensive Income ("OCI") on Derivatives (Effective Portion)			Gains (Losses) Reclassified from Accumulated OCI Into Earnings (Effective Portion)
	Three months ended January 31, 2016			Location	Three months ended January 31, 2016
	In millions				In millions
Cash flow hedges:
Foreign currency contracts	$	91		Net revenue	$	61
Foreign currency contracts	(6		)	Cost of products	1
Foreign currency contracts	(1		)	Other operating expenses	—
Foreign currency contracts	58			Interest and other, net	59
Total cash flow hedges	$	142			$	121
Net investment hedges:
Foreign currency contracts	$	57		Interest and other, net	$	—

As of January 31, 2017 and 2016, no portion of the hedging instruments' gain or loss was excluded from the assessment of effectiveness for fair value, cash flow or net investment hedges. For the three months ended January 31, 2017, there was no hedge ineffectiveness for fair value, cash flow and net investment hedges. For the three months ended January 31, 2016, hedge ineffectiveness for fair value, cash flow and net investment hedges was not material.

As of January 31, 2017, the Company expects to reclassify an estimated net Accumulated other comprehensive gain of approximately $16 million, net of taxes, to earnings in the next twelve months, along with the earnings effects of the related forecasted transactions associated with cash flow hedges.

The pre-tax effect of derivative instruments not designated as hedging instruments on the Condensed Consolidated Statements of Earnings for the three months ended January 31, 2017 and 2016 was as follows:



	Gains (Losses) Recognized in Earnings on Derivatives
	Location	Three months ended January 31, 2017
		In millions
Foreign currency contracts	Interest and other, net	$	(47	)
Other derivatives	Interest and other, net	3
Total		$	(44	)



	Gains (Losses) Recognized in Earnings on Derivatives
	Location	Three months ended January 31, 2016
		In millions
Foreign currency contracts	Interest and other, net	$	8
Other derivatives	Interest and other, net	(5		)
Total		$	3