20.

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 amount of gains or losses reclassified from other comprehensive income to earnings resulting from ineffectiveness or from excluding a component of the forward contracts’ gain or loss from the effectiveness calculation for cash flow hedges during 2012, 2011 and 2010 was not material, nor is the amount of gains or losses the Company expects to reclassify from other comprehensive income 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. During 2012, 2011 and 2010, the Company recorded net unrealized gains on cash flow hedges of $13 million, $33 million and $36 million, net of tax, respectively, to other comprehensive income. The after-tax amount of gains or losses reclassified from accumulated other comprehensive income (loss) to earnings resulting from ineffectiveness for 2012, 2011 and 2010 was not material to the Company’s results of operations.

In 2010, the Company reclassified a loss of $24 million, net of tax from accumulated other comprehensive income to earnings in connection with the early termination of certain interest rate swaps related to the repayment of a portion of the Company’s outstanding debt. The Company estimates that approximately $2 million of losses deferred in accumulated other comprehensive income will be recognized in earnings in 2013, which is expected to be offset in earnings by the impact of the underlying hedged items.

The Company uses interest rate swaps, including freestanding derivatives and derivatives designated as cash flow hedges, to manage the risk related to its floating rate corporate debt. In connection with such cash flow hedges, the Company recorded net unrealized gains (losses) of $1 million, $1 million and $(3) million, net of tax, during 2012, 2011 and 2010, respectively, to other comprehensive income.

The Company uses derivatives to manage the risk associated with its floating rate vehicle-backed debt. These derivatives include freestanding derivatives and derivatives designated as cash flow hedges, which have maturities ranging from October 2013 to November 2015. In connection with such cash flow hedges, the Company recorded net unrealized gains of $12 million, $32 million and $39 million, net of tax, during 2012, 2011 and 2010, respectively, to other comprehensive income. The Company recorded losses of $3 million, $2 million and $4 million related to freestanding derivatives during 2012, 2011 and 2010, respectively.

Commodity Risk. The Company periodically enters into derivative commodity contracts to manage its exposure to changes in the price of unleaded gasoline. These instruments were designated as freestanding derivatives and the changes in fair value are recorded in the Company’s consolidated results of operations. These derivatives resulted in a gain of $3 million in 2012, a loss of less than $1 million in 2011 and a gain of $1 million in 2010.

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 counterparties or groups of counterparties at December 31, 2012 or 2011 other than (i) risks related to the Company’s repurchase and guaranteed depreciation agreements with domestic and foreign car manufacturers, including General Motors Company, Ford Motor Company, Chrysler Group LLC, PSA Peugeot Citroën, Volkswagen Group, Toyota Motor Corporation, Kia Motors America, Fiat Group Automobiles S.p.A. and Renault S.A., 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 the Separation 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 contracts and commodity contracts.

The Company used significant observable inputs (Level 2 inputs), other than quoted unadjusted prices from active markets (Level 1 inputs), to determine the fair value of its derivative assets and liabilities. Their carrying value represents their fair value.

Certain of the Company’s derivative instruments contain collateral support provisions that require the Company to post cash collateral to the extent that these derivatives are in a liability position. The aggregate fair value of such derivatives that are in a liability position and the aggregate fair value of assets needed to settle these derivatives as of December 31, 2012 was approximately $6 million, for which the Company has posted cash collateral in the normal course of business.

As of December 31, 2012 and 2011, the Company held derivative instruments with absolute notional values as follows: interest rate caps of $5.8 billion (representing approximately $4.1 billion of interest rate caps sold, partially offset by $1.7 billion of interest rate caps purchased, which amount excludes $2.4 billion of interest rate caps purchased by the Company’s Avis Budget Rental Car Funding subsidiary), and $8.1 billion (representing approximately $7.2 billion of interest rate caps sold, partially offset by $900 million of interest rate caps purchased, which amount excludes $6.4 billion of interest rate caps purchased by the Company’s Avis Budget Rental Car Funding subsidiary), interest rate swaps of $625 million and $130 million, currency exchange forward contracts of $14 million and $326 million, and currency exchange swaps of $984 million and $593 million, respectively.

Fair values of derivative instruments are as follows:


	As of December 31, 2012				As of December 31, 2011
	Fair Value, Asset Derivatives		Fair Value, Liability Derivatives		Fair Value, Asset Derivatives		Fair Value, Liability Derivatives
Derivatives designated as hedging instruments ^(a)
Interest rate swaps ^(b)	$	-	$	1	$	-	$	3

Derivatives not designated as hedging instruments ^(a)
Currency exchange forward contracts ^(c)		3		8		26		1
Interest rate swaps ^(b)		-		12		-		-
Interest rate contracts ^(d)		-		4		2		4
Commodity contracts ^(e)		-		-		-		1

Total	$	3	$	25	$	28	$	9

^(a)

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, as discussed in Note 17—Stockholders’ Equity.

^(b)

Included in other non-current liabilities.

^(c)

Included in other current assets and other current liabilities.

^(d)

Included in assets under vehicle programs and liabilities under vehicle programs.

^(e)

Included in other current liabilities.

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


	Year Ended December 31,
	2012		2011		2010
Derivatives designated as hedging instruments
Interest rate swaps ^(a)	$	13	$	33	$	36

Derivatives not designated as hedging instruments
Currency exchange forward contracts ^(b)		(31)		(19)		12
Interest rate contracts ^(c)		(15)		(3)		(4)
Commodity contracts ^(d)		3		-		1

Total	$	(30)	$	11	$	45

^(a)

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

^(b)

For the year ended December 31, 2012, included a $32 million loss included in interest expense, and included a $1 million gain included in operating expenses. For the year ended December 31, 2011, included a $46 million loss in transaction-related costs and a $27 million gain in operating expenses. For the year ended December 31, 2010, amounts were included in operating expenses.

^(c)

For the year ended December 31, 2011, $2 million of expense is included in vehicle interest, net and $1 million of expense is included in interest expense. For the years ended December 31, 2012 and 2010 amounts are included in vehicle interest, net.

^(d)

Included in operating expenses.

The loss on the interest rate swaps had no impact on net interest expense as it was offset by reduced interest expense on the underlying floating rate debt which it hedges.

Debt Instruments

The fair value of the Company’s financial instruments is generally determined by reference to market values resulting from trading on a national securities exchange or in an over-the-counter market. In some cases where quoted market prices are not available, prices are derived by considering the yield of the benchmark security that was issued to initially price the instruments and adjusting this rate by the credit spread that market participants would demand for the instruments as of the measurement date. In situations where long-term borrowings are part of a conduit facility backed by short-term floating rate debt, the Company has determined that its carrying value approximates the fair value of this debt. The carrying amounts of cash and cash equivalents, available-for-sale securities, accounts receivable, program cash and accounts payable and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities.

The carrying amounts and estimated fair values of financial instruments at December 31 are as follows:


	2012				2011
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Corporate debt
Short-term debt and current portion of long-term debt	$	57	$	58	$	37	$	37
Long-term debt, excluding convertible debt ^(a)		2,720		2,903		2,823		2,842
Convertible debt ^(a)		128		171		345		354

Debt under vehicle programs
Vehicle-backed debt due to Avis Budget Rental Car Funding ^(a)	$	5,203	$	5,391	$	4,574	$	4,643
Vehicle-backed debt ^(a)		1,599		1,613		986		1,001
Interest rate swaps and interest rate contracts ^(b)		4		4		4		4

^(a)

The fair value measurements are based on significant observable inputs (Level 2).

^(b)

Derivatives in liability position.