Financial Instruments

Cash Equivalents and Available-for-Sale Investments

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



	As of October 31, 2018									As of October 31, 2017
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	In millions
Cash Equivalents:
Time deposits	$	781	$	—	$	—		$	781	$	1,159	$	—	$	—		$	1,159
Money market funds	2,340		—		—			2,340		5,592		—		—			5,592
Total cash equivalents	3,121		—		—			3,121		6,751		—		—			6,751
Available-for-Sale Investments:
Foreign bonds	113		18		—			131		183		40		—			223
Other debt securities	26		—		(1		)	25		37		—		(11		)	26
Total available-for-sale investments	139		18		(1		)	156		220		40		(11		)	249
Total cash equivalents and available-for-sale investments	$	3,260	$	18	$	(1	)	$	3,277	$	6,971	$	40	$	(11	)	$	7,000

All highly liquid investments with original maturities of three months or less at the date of acquisition are considered cash equivalents. As of October 31, 2018 and 2017, the carrying amount of cash equivalents approximated fair value due to the short period of time to maturity. Interest income related to cash, cash equivalents and debt securities was approximately $104 million in fiscal 2018 and 2017 and $105 million in fiscal 2016. Time deposits were primarily issued by institutions outside the U.S. as of October 31, 2018 and 2017. The estimated fair value of the available-for-sale investments may not be representative of values that will be realized in the future.

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



	As of October 31, 2018
	Amortized Cost		Fair Value
	In millions
Due in more than five years	$	139	$	156

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 Consolidated Balance Sheets. These investments amounted to $162 million and $149 million at October 31, 2018 and 2017, respectively.

Investments in equity securities that are accounted for using the equity method are included in Investments in equity interests in the Consolidated Balance Sheets. These amounted to $2.4 billion and $2.5 billion at October 31, 2018 and 2017, respectively. For additional information, see Note 21, "Equity Method Investments".

Derivative Instruments

The Company 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 are recognized at fair value in the Consolidated Balance Sheets. The change in fair value of the derivative instruments is recognized in the Consolidated Statements of Earnings or 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 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 allows 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 $290 million and $265 million at October 31, 2018 and 2017, 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 October 31, 2018 and 2017.

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 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 can extend up 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 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 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 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 Consolidated Statements of Earnings in the same period in which ineffectiveness occurs. Amounts excluded from the assessment of effectiveness are recognized in the Consolidated Statements of Earnings in the period they arise.

Fair Value of Derivative Instruments in the Consolidated Balance Sheets

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



	As of October 31, 2018										As of October 31, 2017
			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	$	6,850	$	—	$	—	$	—	$	353	$	9,500	$	—	$	—	$	16	$	126
Cash flow hedges:
Foreign currency contracts	8,423		270		107		11		15		7,202		105		45		101		70
Net investment hedges:
Foreign currency contracts	1,737		32		41		13		11		1,944		35		10		36		41
Total derivatives designated as hedging instruments	17,010		302		148		24		379		18,646		140		55		153		237
Derivatives not designated as hedging instruments
Foreign currency contracts	6,780		41		5		55		12		9,552		61		3		79		8
Other derivatives	104		—		—		6		—		96		1		—		—		—
Total derivatives not designated as hedging instruments	6,884		41		5		61		12		9,648		62		3		79		8
Total derivatives	$	23,894	$	343	$	153	$	85	$	391	$	28,294	$	202	$	58	$	232	$	245

Offsetting of Derivative Instruments

The Company recognizes all derivative instruments on a gross basis in the 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 October 31, 2018 and 2017, 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 October 31, 2018
	In the 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	$	496	$	—	$	496	$	179	$	205	(1)	$	112
Derivative liabilities	$	476	$	—	$	476	$	179	$	302	(2)	$	(5	)



	As of October 31, 2017
	In the 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	$	260	$	—	$	260	$	209	$	34	(1)	$	17
Derivative liabilities	$	477	$	—	$	477	$	209	$	242	(2)	$	26


(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 in cash or 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. As of October 31, 2018, $302 million of collateral posted was entirely cash. As of October 31, 2017, of the$242 million of collateral posted, $220 million was in cash and $22 million was through the re-use of counterparty collateral.

Effect of Derivative Instruments on the Consolidated Statements of Earnings

The pre-tax effect of derivative instruments and related hedged items in a fair value hedging relationship for the fiscal years ended October 31, 2018, 2017 and 2016 was as follows:



	Gains (Losses) Recognized in Income on Derivative and Related Hedged Item
Derivative Instrument	Location	2018			2017			2016		Hedged Item	Location	2018		2017		2016
		In millions										In millions
Interest rate contracts	Interest and other, net	$	(211	)	$	(245	)	$	158	Fixed-rate debt	Interest and other, net	$	211	$	245	$	(158	)

The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships for the fiscal years ended October 31, 2018, 2017 and 2016 was as follows:



	Gains (Losses) Recognized in OCI on Derivatives (Effective Portion)								Gains (Losses) Reclassified from Accumulated OCI Into Earnings (Effective Portion)
	2018		2017			2016			Location	2018			2017			2016
	In millions									In millions
Cash flow hedges:
Foreign currency contracts	$	163	$	(113	)	$	(71	)	Net revenue	$	(24	)	$	(68	)	$	(48	)
Foreign currency contracts	—		(1		)	1			Cost of products	—			—			—
Foreign currency contracts	—		—			—			Gain on H3C and MphasiS divestitures	—			—			8
Foreign currency contracts	6		159			236			Interest and other, net	16			170			243
Subtotal	169		45			166			Net earnings from continuing operations	(8		)	102			203
Foreign currency contracts	—		1			60			Net loss from discontinued operations	—			43			67
Total cash flow hedges	$	169	$	46		$	226		Net earnings	$	(8	)	$	145		$	270
Net investment hedges:
Foreign currency contracts	$	81	$	(71	)	$	(58	)	Interest and other, net	$	—		$	—		$	—

As of October 31, 2018, 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. Hedge ineffectiveness for fair value, cash flow and net investment hedges was not material for fiscal 2018, 2017 and 2016.

As of October 31, 2018, the Company expects to reclassify an estimated net accumulated other comprehensive gain of approximately $119 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 Consolidated Statements of Earnings for the fiscal years ended October 31, 2018, 2017 and 2016 was as follows:



	Gains (Losses) Recognized in Income on Derivatives
	Location	2018			2017			2016
		In millions
Foreign currency contracts	Interest and other, net	$	301		$	(443	)	$	(425	)
Other derivatives	Interest and other, net	(6		)	3			(4		)
Total		$	295		$	(440	)	$	(429	)