Derivatives and Hedging

12 Months Ended

Dec. 31, 2012

Derivatives and Hedging

Derivatives and Hedging

14.    Derivatives and Hedging

        The Company is exposed to market risks, including changes in foreign currency exchange rates and interest rates. To manage the risk related to these exposures, the Company enters into various derivative instruments that reduce these market risks by creating offsetting exposures. The Company does not enter into derivative transactions for trading or speculative purposes.

Foreign Exchange Risk Management

        The Company is exposed to foreign exchange risk when it receives revenues, pays expenses, or enters into intercompany loans denominated in a currency that differs from its functional currency. The Company uses foreign exchange derivatives, typically forward contracts, options and cross currency swaps, to reduce its overall exposure to the effects of currency fluctuations on cash flows. These exposures are hedged, on average, for less than two years; however, in limited instances, the Company has hedged certain exposures up to five years in the future.

        The Company also uses foreign exchange derivatives, typically forward contracts and options, to manage the currency exposure of the Company's global liquidity profile typically up to one year in the future. These derivatives are not accounted for as hedges, and changes in fair value are recorded each period in Other income (expense) in the Consolidated Statements of Income.

Interest Rate Risk Management

        The Company holds variable-rate short-term brokerage and other operating deposits. The Company uses interest rate derivatives, typically swaps, to reduce its exposure to the effects of interest rate fluctuations on the forecasted interest receipts from these deposits typically up to two years in the future.

        Certain derivatives also give rise to credit risks from the possible non-performance by counterparties. The credit risk is generally limited to the fair value of those contracts that are favorable to the Company. The Company has limited its credit risk by using International Swaps and Derivatives Association ("ISDA") master agreements, collateral and credit support arrangements, entering into non-exchange-traded derivatives with highly-rated major financial institutions and by using exchange-traded instruments. The Company monitors the credit worthiness of, and exposure to, its counterparties. As of December 31, 2012, all net derivative positions were free of credit risk contingent features. The Company has not received or pledged any collateral as of December 31, 2012.

        The notional and fair values of derivative instruments are as follows (in millions):

					Derivative Assets (1)				Derivative Liabilities (2)
	Notional Amount				Fair Value				Fair Value
As of December 31	2012		2011		2012		2011		2012		2011
Derivatives accounted for as hedges:
Interest rate contracts	$	336	$	702	$	17	$	16	$	—	$	—
Foreign exchange contracts		1,819		1,297		191		140		250		188
Total		2,155		1,999		208		156		250		188
Derivatives not accounted for as hedges:
Foreign exchange contracts		305		246		2		1		1		1
Total	$	2,460	$	2,245	$	210	$	157	$	251	$	189

(1)

Included within Other current assets or Other non-current assets

(2)

Included within Other liabilities or Other non-current liabilities

        The amounts of derivative gains (losses) recognized in the Consolidated Financial Statements are as follows (in millions):

	December 31,
Gain (Loss) recognized in Accumulated Other Comprehensive Loss:	2012			2011
Cash flow hedges:
Interest rate contracts	$	—		$	(1	)
Foreign exchange contracts		(21	)		(54	)
Total		(21	)		(55	)
Foreign net investment hedges:
Foreign exchange contracts	$	4		$	(2	)
Gain (Loss) reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion):
Cash flow hedges:
Interest rate contracts (1)	$	(1	)	$	—
Foreign exchange contracts (2)		(34	)		(36	)
Total		(35	)		(36	)
Foreign net investment hedges:
Foreign exchange contracts	$	—		$	—

(1)

Included within Fiduciary investment income and Interest expense

(2)

Included within Other income (expense)

        The amount of gain (loss) recognized in the Consolidated Financial Statements is as follows (in millions):

	Twelve months ended December 31,
	Amount of Gain (Loss) Recognized in Income on Derivative(2)				Amount of Gain (Loss) Recognized in Income on Related Hedged Item
	2012		2011		2012			2011
Fair value hedges:
Foreign exchange contracts(1)	$	1	$	2	$	(1	)	$	(2	)

(1)

Relates to fixed rate debt

(2)

Included in interest expense

        It is estimated that approximately $20 million of pretax losses currently included within Accumulated other comprehensive loss will be reclassified into earnings in the next twelve months.

        The amount of gain (loss) recognized in income on the ineffective portion of derivatives for 2012, 2011 and 2010 was not material.

        The Company recorded a gain of $13 million and a loss of $9 million in Other income (expense) for foreign exchange derivatives not designated or qualifying as hedges for 2012 and 2011, respectively.