Financial Instruments

Derivative Instruments and Hedging Activities

The Company uses currency exchange contracts to manage its exposure to changes in currency exchange rates associated with its non-U.S.-dollar denominated receivables and forecasted royalties, forecasted earnings of non-U.S. subsidiaries and forecasted non-U.S.-dollar denominated acquisitions. The Company primarily hedges a portion of its current-year currency exposure to the Australian, Canadian and New Zealand dollars, the Euro and the British pound sterling. The majority of forward contracts do not qualify for hedge accounting treatment. The fluctuations in the value of these forward contracts do, however, largely offset the impact of changes in the value of the underlying risk they economically hedge. Forward contracts used to hedge forecasted third-party receipts and disbursements up to 12 months are designated and do qualify as cash flow hedges.

The Company has designated its 6% Euro-denominated notes as a hedge of its net investment in Euro-denominated foreign operations. For the three months ended March 31, 2015, the Company recorded a $37 million gain in accumulated other comprehensive income as part of currency translation adjustments. There was no ineffectiveness related to the Company’s net investment hedges during the three months ended March 31, 2015 and the Company does not expect to reclassify any amounts from accumulated other comprehensive income into earnings over the next 12 months.

The Company uses various hedging strategies including interest rate swaps and interest rate caps to create an appropriate mix of fixed and floating rate assets and liabilities. The Company uses interest rate swaps and interest rate caps to manage the risk related to its floating rate corporate debt and its floating rate vehicle-backed debt. The Company records the effective portion of changes in the fair value of its cash flow hedges to other comprehensive income, net of tax, and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized. The Company records the gains or losses related to freestanding derivatives, which are not designated as a hedge for accounting purposes, in its consolidated results of operations. The changes in fair values of hedges that are determined to be ineffective are immediately reclassified from accumulated other comprehensive income into earnings. There was no ineffectiveness related to the Company’s cash flow hedges during the three months ended March 31, 2015. The Company estimates that $8 million of losses currently recorded in accumulated other comprehensive income will be recognized in earnings over the next 12 months.

The Company enters into derivative commodity contracts to manage its exposure to changes in the price of unleaded gasoline. Changes in the fair value of these derivatives are recorded within operating expenses.

The Company held derivative instruments with absolute notional values as follows:



	As of March 31, 2015
Interest rate caps ^(a)	$	8,096
Interest rate swaps	1,663
Foreign exchange contracts	1,062

Commodity contracts (millions of gallons of unleaded gasoline)	17

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^(a)	Represents $6.1 billion of interest rate caps sold, partially offset by approximately $2.0 billion of interest rate caps purchased. These amounts exclude $4.1 billion of interest rate caps purchased by the Company’s Avis Budget Rental Car Funding subsidiary as it is not consolidated by the Company.

Fair values (Level 2) of derivative instruments were as follows:



		As of March 31, 2015				As of December 31, 2014
		Fair Value, Asset Derivatives		Fair Value, Liability Derivatives		Fair Value, Asset Derivatives		Fair Value, Liability Derivatives
Derivatives designated as hedging instruments
	Interest rate swaps ^(a)	$	—	$	8	$	1	$	3

Derivatives not designated as hedging instruments
	Interest rate caps ^(b)	—		5		—		10
	Interest rate swaps	—		—		—		—
	Foreign exchange contracts ^(c)	17		8		5		2
	Commodity contracts ^(c)	1		—		—		1
	Total	$	18	$	21	$	6	$	16

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Amounts in this table exclude derivatives issued by Avis Budget Rental Car Funding; however, certain amounts related to the derivatives held by Avis Budget Rental Car Funding are included within accumulated other comprehensive income.


^(a)	Included in other non-current assets or other non-current liabilities.


^(b)	Included in assets under vehicle programs or liabilities under vehicle programs.


^(c)	Included in other current assets or other current liabilities.

The effects of derivatives recognized in the Company’s Consolidated Condensed Financial Statements were as follows:



		Three Months Ended March 31,
		2015			2014
Derivatives designated as hedging instruments
	Interest rate swaps ^(a)	$	(3	)	$	1
Derivatives not designated as hedging instruments ^(b)
	Interest rate caps ^(c)	—			—
	Foreign exchange contracts^(d)	35			(18		)
	Commodity contracts ^(e)	—			—
	Total	$	32		$	(17	)

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^(a)	Recognized, net of tax, as a component of other comprehensive income within stockholders’ equity.


^(b)	Gains (losses) related to derivative instruments are expected to be largely offset by (losses) gains on the underlying exposures being hedged.


^(c)	Included in interest expense.


^(d)	For the three months ended March 31, 2015, included a $21 million gain in interest expense and a $14 million gain in operating expense. For the three months ended March 31, 2014 included a $14 million loss in interest expense and a $4 million loss in operating expense.


^(e)	Included in operating expense.

Debt Instruments

The carrying amounts and estimated fair values (Level 2) of debt instruments were as follows:



		As of March 31, 2015				As of December 31, 2014
		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Corporate debt
	Short-term debt and current portion of long-term debt	$	244	$	264	$	28	$	28
	Long-term debt	3,481		3,541		3,392		3,439

Debt under vehicle programs
	Vehicle-backed debt due to Avis Budget Rental Car Funding	$	6,838	$	6,927	$	6,340	$	6,407
	Vehicle-backed debt	1,497		1,508		1,766		1,771
	Interest rate swaps and interest rate contracts ^(a)	6		6		10		10

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^(a)	Derivatives in a liability position.