
	Financial Instruments

Risk Management

Currency Risk. 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 investment in Euro-denominated foreign operations.

The amount of gains or losses reclassified from other comprehensive income (loss) to earnings resulting from ineffectiveness or from excluding a component of the hedges’ gain or loss from the effectiveness calculation for cash flow and net investment hedges during 2015, 2014 and 2013 was not material, nor is the amount of gains or losses the Company expects to reclassify from accumulated other comprehensive income (loss) to earnings over the next 12 months.

Interest Rate Risk. 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 after-tax amount of gains or losses reclassified from accumulated other comprehensive income (loss) to earnings resulting from ineffectiveness for 2015, 2014 and 2013 was not material to the Company’s results of operations. The Company expects $5 million of losses currently deferred in accumulated other comprehensive income (loss) to be recognized in earnings during 2016.

Commodity Risk. The Company periodically enters into derivative commodity contracts to manage its exposure to changes in the price of gasoline. These instruments were designated as freestanding derivatives and the changes in fair value are recorded in the Company’s consolidated results of operations.

Credit Risk and Exposure. The Company is exposed to counterparty credit risks in the event of nonperformance by counterparties to various agreements and sales transactions. The Company manages such risk by evaluating the financial position and creditworthiness of such counterparties and by requiring collateral in certain instances in which financing is provided. The Company mitigates counterparty credit risk associated with its derivative contracts by monitoring the amount for which it is at risk with each counterparty, periodically evaluating counterparty creditworthiness and financial position, and where possible, dispersing its risk among multiple counterparties.

There were no significant concentrations of credit risk with any individual counterparty or groups of counterparties at December 31, 2015 or 2014, other than (i) risks related to the Company’s repurchase and guaranteed depreciation agreements with domestic and foreign car manufacturers, including Ford, General Motors, Chrysler, Peugeot, Volkswagen, Fiat, Kia, Toyota, Mercedes, Renault and Hyundai, and primarily with respect to receivables for program cars that were disposed but for which the Company has not yet received payment from the manufacturers (see Note 2-Summary of Significant Accounting Policies), (ii) receivables from Realogy and Wyndham related to certain contingent, income tax and other corporate liabilities assumed by Realogy and Wyndham in connection with their disposition and (iii) risks related to leases which have been assumed by Realogy, Wyndham or Travelport but of which the Company is a guarantor. Concentrations of credit risk associated with trade receivables are considered minimal due to the Company’s diverse customer base. The Company does not normally require collateral or other security to support credit sales.

Fair Value

Derivative instruments and hedging activities

As described above, derivative assets and liabilities consist principally of currency exchange contracts, interest rate swaps, interest rate caps and commodity contracts.

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



	As of December 31,
	2015		2014
Interest rate caps ^(a)	$	10,179	$	8,333
Interest rate swaps	900		1,592
Foreign exchange contracts	811		493

__________

^(a)

Represents $8.2 billion of interest rate caps sold, partially offset by approximately $2.0 billion of interest rate caps purchased at December 31, 2015 and $6.2 billion of interest rate caps sold, partially offset by approximately $2.1 billion of interest rate caps purchased at December 31, 2014. These amounts exclude $6.2 billion and $4.2 billion of interest rate caps purchased by the Company’s Avis Budget Rental Car Funding subsidiary at December 31, 2015 and 2014, respectively.

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



		As of December 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)	$	1	$	5	$	1	$	3
Derivatives not designated as hedging instruments
	Interest rate caps ^(b)	1		5		—		10
	Foreign exchange contracts ^(c)	16		2		5		2
	Commodity contracts ^(c)	—		1		—		1
	Total	$	18	$	13	$	6	$	16

__________

Amounts in this table exclude derivatives issued by Avis Budget Rental Car Funding, as it is not consolidated by the Company; however, certain amounts related to the derivatives held by Avis Budget Rental Car Funding are included within accumulated other comprehensive income (loss), as discussed in Note 15-Stockholders’ Equity.


^(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 Financial Statements are as follows:



		Year Ended December 31,
		2015			2014			2013
Financial instruments designated as hedging instruments ^(a)
	Interest rate swaps	$	(1	)	$	(2	)	$	1
	Euro-denominated notes	34			46			(11		)
Financial instruments not designated as hedging instruments ^(b)
	Foreign exchange contracts ^(c)	48			8			27
	Interest rate caps ^(d)	(2		)	(3		)	4
	Commodity contracts ^(e)	—			(3		)	1
Total		$	79		$	46		$	22

__________


^(a)	Recognized, net of tax, as a component of accumulated 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)

For the year ended December 31, 2015, included a $32 million gain included in interest expense and a $16 million gain included in operating expenses. For the year ended December 31, 2014, included a $10 million gain in interest expense and a $2 million loss included in operating expenses. For the year ended December 31, 2013, included a $20 million gain in interest expense and a $7 million gain included in operating expenses.


^(d)	For the years ended December 31, 2015 and 2014, amounts are included in vehicle interest, net. For the year ended December 31, 2013, $1 million of expense is included in vehicle interest, net and a $5 million gain is included in interest expense.


^(e)	Included in operating expenses.

Debt Instruments

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



		As of December 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	$	26	$	26	$	28	$	28
	Long-term debt	3,435		3,478		3,325		3,439

Debt under vehicle programs
	Vehicle-backed debt due to Avis Budget Rental Car Funding	$	6,796	$	6,836	$	6,296	$	6,407
	Vehicle-backed debt	2,060		2,071		1,750		1,771
	Interest rate swaps and interest rate caps ^(a)	4		4		10		10

___________

The carrying values of long-term debt, vehicle-backed debt due to Avis Budget Rental Car Funding and vehicle-backed debt as of December 31, 2014 have been retrospectively adjusted by $67 million, $44 million and $16 million, respectively, to include debt issuance costs, which are presented as a reduction of the corresponding liability.


^(a)	Derivatives in liability position.