Note 8: Financial Instruments

Cash Equivalents and Available-for-Sale Investments

Cash equivalents and available-for-sale investments at fair value as of April 30, 2013 and October 31, 2012 were as follows:

	April 30, 2013									October 31, 2012

	Cost		Gross Unrealized Gain		Gross Unrealized Loss			Estimated Fair Value		Cost		Gross Unrealized Gain		Gross Unrealized Loss			Estimated Fair Value
	In millions
Cash Equivalents
Time deposits	$	2,873	$	—	$	—		$	2,873	$	3,633	$	—	$	—		$	3,633
Money market funds		7,169		—		—			7,169		4,630		—		—			4,630
Mutual funds		39		—		—			39		69		—		—			69

Total cash equivalents		10,081		—		—			10,081		8,332		—		—			8,332

Available-for-Sale Investments
Debt securities:
Time deposits		13		—		—			13		8		—		—			8
Foreign bonds		300		92		—			392		303		82		—			385
Other debt securities		58		—		(18	)		40		62		—		(17	)		45

Total debt securities		371		92		(18	)		445		373		82		(17	)		438

Equity securities:
Mutual funds		332		—		—			332		400		—		—			400
Equity securities in public companies		50		24		(2	)		72		50		9		—			59

Total equity securities		382		24		(2	)		404		450		9		—			459

Total available-for-sale investments		753		116		(20	)		849		823		91		(17	)		897

Total cash equivalents and available-for-sale investments	$	10,834	$	116	$	(20	)	$	10,930	$	9,155	$	91	$	(17	)	$	9,229

All highly liquid investments with original maturities of three months or less at the date of acquisition are considered to be cash equivalents. Time deposits were primarily issued by institutions outside the United States as of April 30, 2013 and October 31, 2012. Investments in debt and marketable equity securities are generally considered available-for-sale. The estimated fair values of the available-for-sale investments may not be representative of actual values that will be realized in the future.

The gross unrealized loss as of April 30, 2013 and October 31, 2012 was due primarily to decline in the fair value of a debt security of $18 million and $17 million, respectively, that has been in a continuous loss position for more than twelve months. HP does not intend to sell this debt security, and it is not likely that HP will be required to sell this debt security prior to the recovery of the amortized cost. HP has evaluated the near-term prospects of its debt and equity investments in a gross unrealized loss positions in relation to the severity and duration of the impairment and considers the decline in market value of these investments to be temporary in nature.

Contractual maturities of short-term and long-term investments in available-for-sale debt securities were as follows:

	April 30, 2013

	Cost		Estimated Fair Value
	In millions
Due in one to five years	$	14	$	14
Due in more than five years		357		431

	$	371	$	445

Equity securities in privately held companies include cost basis and equity method investments. These amounted to $52 million and $51 million for the periods ended April 30, 2013 and October 31, 2012 and are included in long-term financing receivables and other assets.

Derivative Financial Instruments

HP is a global company that is 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, HP uses derivative instruments, primarily forward contracts, option contracts, interest rate swaps, and total return swaps, to hedge certain foreign currency, interest rate and, to a lesser extent, equity exposures. HP'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 fair values of assets and liabilities. HP does not have any leveraged derivatives and does not use derivative contracts for speculative purposes. HP designates its derivatives 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, HP categorizes those economic hedges as other derivatives. HP recognizes all derivatives, on a gross basis, in the Consolidated Condensed Balance Sheets at fair value. HP classifies cash flows from the derivative programs as operating activities in the Consolidated Condensed Statements of Cash Flows.

As a result of the use of derivative instruments, HP is exposed to the risk that its counterparties will fail to meet their contractual obligations. To mitigate counterparty credit risk, HP has a policy of only entering into contracts with carefully selected major financial institutions based upon their credit ratings and other factors, and HP maintains dollar risk limits that correspond to each institution's credit rating and other factors. HP's established policies and procedures for mitigating credit risk include reviewing and establishing limits for credit exposure and periodically re-assessing the creditworthiness of counterparties. Master agreements with counterparties include master netting arrangements as further mitigation of credit exposure to counterparties. These arrangements permit HP to net amounts due from HP to a counterparty with amounts due to HP from the same counterparty.

To further mitigate credit exposure to counterparties, HP has collateral security arrangements with substantially all of its counterparties. These arrangements require HP to post collateral or to hold collateral from counterparties when the derivative fair values exceed contractually established thresholds which are generally based on the credit ratings of HP and its counterparties. Such funds are generally transferred within two business days of the due date. As of April 30, 2013, HP held $266 million of collateral and posted $137 million through re-use of counterparty cash collateral under these collateralized arrangements. As of October 31, 2012, HP held $198 million of collateral and posted $72 million under these collateralized arrangements, of which $49 million was through re-use of counterparty cash collateral and $23 million in cash.

Fair Value Hedges

HP enters into derivatives to reduce the exposure of its debt portfolio to interest rate risk. HP issues long-term debt in U.S. dollars based on market conditions at the time of financing. HP uses interest rate swaps to mitigate the market risk exposures in connection with the debt to achieve a primarily U.S. dollar LIBOR-based floating interest expense. The swap transactions generally involve principal and interest obligations for U.S. dollar-denominated amounts. Alternatively, HP 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, HP may enter into interest rate swaps that convert the fixed interest payments into variable interest payments and would classify these swaps as fair value hedges.

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

Cash Flow Hedges

HP uses a combination of forward contracts and options 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. HP's foreign currency cash flow hedges mature generally within twelve months. However, certain leasing revenue-related forward contracts and intercompany loan forward contracts extend for the duration of the lease term, which can be up to five years.

For derivative instruments that are designated and qualify as cash flow hedges, HP initially records the effective portion of the gain or loss on the derivative instrument in accumulated other comprehensive income or loss as a separate component of stockholders' equity and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in earnings. HP reports the effective portion of cash flow hedges in the same financial statement line item as the changes in value of the hedged item. During the three and six months ended April 30, 2013 there was no significant impact to results of operations as a result of discontinued cash flow hedges. During the three and six months ended April 30, 2012, HP did not discontinue any cash flow hedge for which it was probable that a forecasted transaction would not occur.

Net Investment Hedges

HP uses forward contracts designated as net investment hedges to hedge net investments in certain foreign subsidiaries whose functional currency is the local currency. These derivative instruments are designated as net investment hedges and, as such, HP records the effective portion of the gain or loss on the derivative instrument together with changes in the hedged items in cumulative translation adjustment as a separate component of stockholders' equity.

Other Derivatives

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

For derivative instruments not designated as hedging instruments, HP recognizes changes in the fair values in earnings in the period of change. HP recognizes the gain or loss on foreign currency forward contracts used to hedge balance sheet exposures in Interest and other, net in the same period as the remeasurement gain and loss of the related foreign currency denominated assets and liabilities. HP recognizes the gain or loss on the total return swaps and interest rate swaps in Interest and other, net in the same period as the gain or loss from the change in market value of the executive deferred compensation plan liability.

Hedge Effectiveness

For interest rate swaps designated as fair value hedges, HP measures effectiveness by offsetting the change in fair value of the hedged debt with the change in fair value of the derivative. For foreign currency options and forward contracts designated as cash flow or net investment hedges, HP measures effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item, both of which are based on forward rates. HP recognizes any ineffective portion of the hedge, as well as amounts not included in the assessment of effectiveness, in the Consolidated Condensed Statements of Earnings.

Fair Value of Derivative Instruments in the Consolidated Condensed Balance Sheets

As discussed in Note 7, HP estimates the fair values of derivatives primarily based on pricing models using current market rates and records all derivatives on the balance sheet at fair value. The gross notional and fair value of derivative financial instruments in the Consolidated Condensed Balance Sheets were as follows:

	As of April 30, 2013										As of October 31, 2012

	Gross Notional⁽¹⁾		Other Current Assets		Long-term Financing Receivables and Other Assets		Other Accrued Liabilities		Other Liabilities		Gross Notional⁽¹⁾		Other Current Assets		Long-term Financing Receivables and Other Assets		Other Accrued Liabilities		Other Liabilities
	In millions
Derivatives designated as hedging instruments
Fair value hedges:
Interest rate contracts	$	8,900	$	38	$	210	$	—	$	—	$	7,900	$	43	$	276	$	—	$	—
Cash flow hedges:
Foreign exchange contracts		17,230		123		49		332		70		19,409		160		24		277		79
Net investment hedges:
Foreign exchange contracts		1,901		12		22		29		25		1,683		14		15		36		24

Total derivatives designated as hedging instruments		28,031		173		281		361		95		28,992		217		315		313		103

Derivatives not designated as hedging instruments
Foreign exchange contracts		16,246		90		14		85		15		18,687		61		17		51		19
Interest rate contracts⁽²⁾		2,200		9		—		10		—		2,200		25		—		29		—
Other derivatives		350		7		1		—		—		383		1		—		3		—

Total derivatives not designated as hedging instruments		18,796		106		15		95		15		21,270		87		17		83		19

Total derivatives	$	46,827	$	279	$	296	$	456	$	110	$	50,262	$	304	$	332	$	396	$	122

⁽¹⁾: Represents the face amounts of contracts that were outstanding as of April 30, 2013 and October 31, 2012, respectively.
⁽²⁾: Represents offsetting swaps acquired through previous business combinations that were not designated as hedging instruments.

Effect of Derivative Instruments on the Consolidated Condensed Statements of Earnings

The before-tax effect of derivative instruments and related hedged items in fair value hedging relationships for the three and six months ended April 30, 2013 and 2012 were as follows:

	Gain (Loss) Recognized in Earnings on Derivative and Related Hedged Item

Derivative Instrument	Location	Three months ended April 30, 2013		Six months ended April 30, 2013			Hedged Item	Location	Three months ended April 30, 2013			Six months ended April 30, 2013
		In millions							In millions
Interest rate contracts	Interest and other, net	$	28	$	(71	)	Fixed-rate debt	Interest and other, net	$	(28	)	$	70

	Gain (Loss) Recognized in Earnings on Derivative and Related Hedged Item

Derivative Instrument	Location	Three months ended April 30, 2012			Six months ended April 30, 2012			Hedged Item	Location	Three months ended April 30, 2012		Six months ended April 30, 2012
		In millions								In millions
Interest rate contracts	Interest and other, net	$	(80	)	$	(76	)	Fixed-rate debt	Interest and other, net	$	80	$	80

The before-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three and six months ended April 30, 2013 was as follows:

	Gain (Loss) Recognized in Other Comprehensive Income ("OCI") on Derivative (Effective Portion)						Gain (Loss) Reclassified from Accumulated OCI Into Earnings (Effective Portion)

	Three months ended April 30, 2013			Six months ended April 30, 2013			Location	Three months ended April 30, 2013			Six months ended April 30, 2013
	In millions							In millions
Cash flow hedges:
Foreign exchange contracts	$	206		$	7		Net revenue		$46			$(11	)
Foreign exchange contracts		(44	)		(169	)	Cost of products		(27	)		(30	)
Foreign exchange contracts		3			11		Other operating expenses		4			5
Foreign exchange contracts		(11	)		(9	)	Interest and other, net		1			(4	)

Total cash flow hedges	$	154		$	(160	)			$24			$(40	)

Net investment hedges:
Foreign exchange contracts	$	(2	)	$	(17	)	Interest and other, net		$ —			$ —

The before-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three and six months ended April 30, 2012 was as follows:

	Gain (Loss) Recognized in OCI on Derivative (Effective Portion)						Gain (Loss) Reclassified from Accumulated OCI Into Earnings (Effective Portion)

	Three months ended April 30, 2012			Six months ended April 30, 2012			Location	Three months ended April 30, 2012			Six months ended April 30, 2012
	In millions							In millions
Cash flow hedges:
Foreign exchange contracts	$	(120	)	$	298		Net revenue	$	3		$	86
Foreign exchange contracts		(53	)		(61	)	Cost of products		2			18
Foreign exchange contracts		(1	)		(4	)	Other operating expenses		(1	)		(2	)
Foreign exchange contracts		(17	)		(17	)	Interest and other, net		(15	)		(15	)

Total cash flow hedges	$	(191	)	$	216			$	(11	)	$	87

Net investment hedges:
Foreign exchange contracts	$	13		$	38		Interest and other, net	$	—		$	—

As of April 30, 2013 and 2012, the portion of hedging instruments gain or loss excluded from the assessment of effectiveness was not material for fair value, cash flow or net investment hedges. Hedge ineffectiveness for fair value, cash flow and net investment hedges was not material in the three and six months ended April 30, 2013 and 2012.

As of April 30, 2013, HP expects to reclassify an estimated net accumulated other comprehensive loss of approximately $158 million, net of taxes, to earnings in the next twelve months along with the earnings effects of the related forecasted transactions in association with cash flow hedges.

The before-tax effect of derivative instruments not designated as hedging instruments on the Consolidated Condensed Statements of Earnings for the three and six months ended April 30, 2013 and 2012 was as follows:

	Gain (Loss) Recognized in Earnings on Derivative

	Location	Three months ended April 30, 2013			Six months ended April 30, 2013
		In millions
Foreign exchange contracts	Interest and other, net	$	(15	)	$	(55	)
Other derivatives	Interest and other, net		3			10
Interest rate contracts	Interest and other, net		1			3

Total		$	(11	)	$	(42	)

	Gain (Loss) Recognized in Earnings on Derivative

	Location	Three months ended April 30, 2012			Six months ended April 30, 2012
		In millions
Foreign exchange contracts	Interest and other, net	$	74		$	156
Other derivatives	Interest and other, net		(6	)		(16	)
Interest rate contracts	Interest and other, net		1			11

Total		$	69		$	151