We address market risk from changes in foreign currency exchange rates and interest rates through risk management programs which include the use of derivative and nonderivative financial instruments. We operate these programs pursuant to documented corporate risk management policies and do not enter into derivative transactions for speculative purposes. Our derivative instruments do not subject our earnings to material risk, as the gains or losses on these derivatives generally offset losses or gains recognized on the hedged item.

We manage concentration of counterparty credit risk by limiting acceptable counterparties to major financial institutions with investment grade credit ratings, limiting the amount of credit exposure to individual counterparties and by actively monitoring counterparty credit ratings and the amount of individual credit exposure. We also employ master netting arrangements that limit the risk of counterparty non-payment on a particular settlement date to the net gain that would have otherwise been received from the counterparty. Although not completely eliminated, we do not consider the risk of counterparty default to be significant as a result of these protections. Further, none of our derivative instruments are subject to collateral or other security arrangements, nor do they contain provisions that are dependent on our credit ratings from any credit rating agency.

Our risk from changes in currency exchange rates consists primarily of monetary assets and liabilities, forecast intercompany and third-party transactions, net investments in certain subsidiaries and the purchase price of any acquisition that is denominated in a currency other than the U.S. dollar. We manage currency exchange rate risk at a consolidated level to reduce the cost of hedging by taking advantage of offsetting transactions. We employ derivative and nonderivative instruments, primarily forward currency contracts, to reduce the risk to our earnings and cash flows associated with changes in currency exchange rates.

The success of our currency risk management program depends, in part, on forecast transactions denominated primarily in Euro, Japanese yen, Chinese renminbi and British pound sterling. We may experience unanticipated currency exchange gains or losses to the extent the actual activity is different than forecast. In addition, changes in currency exchange rates related to any unhedged transactions may impact our earnings and cash flows.

Certain of our currency derivative instruments are designated as cash flow hedges under FASB ASC Topic 815, Derivatives and Hedging (FASB ASC Topic 815), and are intended to protect the U.S. dollar value of forecasted transactions. The gain or loss on a derivative instrument designated as a cash flow hedge is recorded in the Net change in derivative financial instruments component of Other comprehensive income (loss), net of tax (OCI) on our consolidated statements of comprehensive income (loss) until the underlying third-party transaction occurs. When the underlying third-party transaction occurs, we recognize the gain or loss in earnings within the Cost of products sold caption of our consolidated statements of operations. In the event the hedging relationship is no longer effective, or if the occurrence of the hedged forecast transaction becomes no longer probable, we reclassify the gains or losses within AOCI to earnings at that time.

We also designate certain forward currency contracts as net investment hedges to hedge a portion of our net investments in certain of our entities with functional currencies denominated in the Euro, Swiss franc, Japanese yen, British pound sterling, South Korean won and Taiwan dollar. We elected to use the spot method to assess effectiveness for our derivatives that are designated as net investment hedges. Under the spot method, the change in fair value attributable to changes in the spot rate is recorded in the Foreign currency translation adjustment (CTA) component of OCI. We have elected to exclude the spot-forward difference from the assessment of hedge effectiveness and are amortizing this amount separately, as calculated at the date of designation, on a straight-line basis over the term of the currency forward contracts. Amortization of the spot-forward difference is then reclassified from AOCI to current period earnings as a component of Interest expense on our consolidated statements of operations. In November 2019, we terminated and settled all of our outstanding forward currency contracts designated as net investment hedges in our entities with Euro-denominated functional currencies and recognized a gain of $95 million presented in the CTA component of OCI on our consolidated statements of comprehensive income (loss).

We also completed an offering of €900 million (approximately $1.000 billion) in aggregate principal amount of 0.625% senior notes due in 2027. The Euro-denominated debt principal is a nonderivative instrument designated as a net investment hedge of our net investments in certain of our Euro functional entities. As of December 31, 2019, the notional value of our outstanding net investment hedges was $1.950 billion, which includes our derivative and nonderivative instruments designated as net investment hedges.

We also use forward currency contracts that are not part of designated hedging relationships under FASB ASC Topic 815 as a part of our strategy to manage our exposure to currency exchange rate risk related to monetary assets and liabilities and related forecast transactions. These non-designated currency forward contracts have an original time to maturity consistent with the hedged currency transaction exposures, generally less than one year, and are marked-to-market with changes in fair value recorded to earnings within the Other, net caption of our consolidated statements of operations.

Certain of our non-designated forward currency contracts were entered into for the purpose of managing our exposure to currency exchange rate risk related to the GBP-denominated purchase price of BTG. In 2019, we settled all outstanding contracts, resulting in a cumulative loss on the contracts of $294 million that was recognized over time in earnings as we adjusted for changes in fair value until the final fair value was determined at maturity. As of December 31, 2018, the notional value of the contracts was $2.550 billion, and we entered into additional contracts in 2019. Upon settlement in 2019, we received £3.312 billion of cash to fund our acquisition of BTG, which translated into $4.303 billion based on hedged currency exchange rates. We recognized a $323 million loss in 2019 and a $29 million gain in 2018 within Other, net due to changes in fair value of the contracts.

Our interest rate risk relates primarily to U.S. dollar borrowings partially offset by U.S. dollar cash investments. We use interest rate derivative instruments to mitigate the risk to our earnings and cash flows associated with exposure to changes in interest rates. Under these agreements we and the counterparty, at specified intervals, exchange the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. We designate these derivative instruments either as fair value or cash flow hedges in accordance with FASB ASC Topic 815.

We had no interest rate derivative instruments designated as cash flow hedges outstanding as of December 31, 2019 and $1.000 billion outstanding as of December 31, 2018, which were intended to manage our earnings and cash flow exposure to changes in the benchmark interest rate in connection with the forecasted issuance of fixed-rate debt. For outstanding designated cash flow hedges, we record the changes in the fair value of the derivatives within OCI until the underlying hedged transaction occurs, at which time we recognize the gain or loss within Interest expense over the same period that the hedged items affect earnings, so long as the hedge relationship remains effective. If we determine the hedging relationship is no longer effective, or if the occurrence of the hedged forecast transaction becomes no longer probable, we reclassify the amount of gains or losses from AOCI to earnings at that time.

During the fourth quarter of 2018, we entered into interest rate derivative contracts designated as cash flow hedges having a notional amount of $1.000 billion to hedge interest rate risk. In the first quarter of 2019, we terminated these instruments in connection with our senior notes issuance in the same period as discussed in Note E – Contractual Obligations and Commitments. We recognized an immaterial loss within OCI in 2019 and are reclassifying the amortization of the loss from AOCI into earnings as a component of Interest expense over the same period that the hedged item affects earnings, so long as the hedge relationship remains effective. We are also continuing to reclassify in a similar manner the amortization of the gains or losses of our other previously terminated interest rate derivative instruments that were designated as cash flow hedges. The balance of the deferred amounts on our terminated cash flow hedges within AOCI was a $34 million loss as of December 31, 2019 and a $7 million gain December 31, 2018. We recognized immaterial gains and losses in Interest expense relating to the amortization of our terminated cash flow hedges in the current and prior periods.

We had no interest rate derivative instruments designated as fair value hedges outstanding as of December 31, 2019 and December 31, 2018. Prior to 2018, we terminated interest rate derivative instruments that were designated as fair value hedges and are continuing to recognize the amortization of the gains or losses originally recorded within the Long-term debt caption on our consolidated balance sheets into earnings as a component of Interest expense over the same period that the discount or premium associated with the hedged items affects earnings. In the event that we designate outstanding interest rate derivative instruments as fair value hedges, we record the changes in the fair values of interest rate derivatives designated as fair value hedges and of the underlying hedged debt instruments in Interest expense, which generally offset. The balance of the deferred gains on our terminated fair value hedges within Long-term debt was immaterial as of December 31, 2019 and December 31, 2018. We recognized immaterial gains in Interest expense relating to the amortization of the terminated fair value hedges in the current and prior periods.



(in millions)	FASB ASC Topic 815 Designation	As of December 31,
(in millions)	FASB ASC Topic 815 Designation	2019		2018
Forward currency contracts	Cash flow hedge	$	3,891	$	3,962
Forward currency contracts	Net investment hedge	953		1,483
Foreign currency-denominated debt⁽¹⁾	Net investment hedge	997		—
Forward currency contracts	Non-designated	4,377		5,880
Interest rate derivative contracts	Cash flow hedge	—		1,000
Total Notional Outstanding		$	10,218	$	12,326

The remaining time to maturity as of December 31, 2019 is within 60 months for all designated forward currency contracts and generally less than one year for all non-designated forward currency contracts. The Euro-denominated debt principal designated as a net investment hedge has a contractual maturity of December 1, 2027.

The following presents the effect of our derivative and nonderivative instruments designated as cash flow and net investment hedges under FASB ASC Topic 815 on our accompanying consolidated statements of operations. Refer to Note P – Changes in Other Comprehensive Income for the total amounts relating to derivative and nonderivative instruments presented within the consolidated statements of comprehensive income (loss).



	Effect of Hedging Relationships on Accumulated Other Comprehensive Income
	Amount Recognized in OCI on Hedges									Consolidated Statements of Operations (1)			Amount Reclassified from AOCI into Earnings
	Pre-Tax Gain (Loss)			Tax Benefit (Expense)			Gain (Loss) Net of Tax			Location of Amount Reclassified	Total Amount of Line Item Presented		Pre-Tax (Gain) Loss			Tax (Benefit) Expense			(Gain) Loss Net of Tax
Year Ended December 31, 2019
Forward currency contracts
Cash flow hedges	$	150		$	(34	)	$	117		Cost of products sold	$	3,116	$	(73	)	$	16		$	(56	)
Net investment hedges (2)	68			(15		)	53			Interest expense	473		(43		)	10			(33		)
Foreign currency-denominated debt
Net investment hedges	(14		)	3			(11		)	Interest expense	473		—			—			—
Interest rate derivative contracts
Cash flow hedges	—			—			—			Interest expense	473		3			(1		)	2
Year Ended December 31, 2018
Forward currency contracts
Cash flow hedges	$	167		$	(38	)	$	130		Cost of products sold	$	2,813	$	19		$	(4	)	$	15
Net investment hedges (2)	56			(13		)	43			Interest expense	241		(27		)	6			(21		)
Interest rate derivative contracts
Cash flow hedges	(44		)	10			(34		)	Interest expense	241		(1		)	—			(1		)
Year Ended December 31, 2017
Forward currency contracts
Cash flow hedges	$	(101	)	$	37		$	(65	)	Cost of products sold	$	2,593	$	(64	)	$	23		$	(41	)
Interest rate derivative contracts
Cash flow hedges	—			—			—			Interest expense	229		(1		)	—			(1		)

As of December 31, 2019, pre-tax net gains or losses for our derivative instruments designated, or previously designated, as cash flow and net investment hedges under FASB ASC Topic 815 that may be reclassified from AOCI to earnings within the next twelve months are presented below (in millions):



Designated Hedging Instrument	FASB ASC Topic 815 Designation	Location on Consolidated Statements of Operations	Amount of Pre-Tax Gain (Loss) that may be Reclassified to Earnings
Forward currency contracts	Cash flow hedge	Cost of products sold	$	77
Forward currency contracts	Net investment hedge	Interest expense	24
Interest rate derivative contracts	Cash flow hedge	Interest expense	(5		)



(in millions)	Location on Consolidated Statements of Operations	Year Ended December 31,
(in millions)	Location on Consolidated Statements of Operations	2019			2018			2017
Net gain (loss) on currency hedge contracts	Other, net	$	(343	)	$	41		$	(25	)
Net gain (loss) on currency transaction exposures	Other, net	(15		)	(30		)	10
Net currency exchange gain (loss)		$	(358	)	$	11		$	(15	)

FASB ASC Topic 815 requires all derivative and nonderivative instruments to be recognized at their fair values as either assets or liabilities on the balance sheet. We determine the fair value of our derivative and nonderivative instruments using the framework prescribed by FASB ASC Topic 820, Fair Value Measurements and Disclosures, and considering the estimated amount we would receive or pay to transfer these instruments at the reporting date with respect to current currency exchange rates, interest rates, the creditworthiness of the counterparty for unrealized gain positions and our own creditworthiness for unrealized loss positions. In certain instances, we may utilize financial models to measure fair value of our derivative and nonderivative instruments. In doing so, we use inputs that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other observable inputs for the asset or liability and inputs derived principally from, or corroborated by, observable market data by correlation or other means. The following are the balances of our derivative and nonderivative assets and liabilities:



(in millions)	Location on Consolidated Balance Sheets (1)	As of December 31,
(in millions)	Location on Consolidated Balance Sheets (1)	2019		2018
Derivative and Nonderivative Assets:
Designated Hedging Instruments
Forward currency contracts	Other current assets	$	72	$	55
Forward currency contracts	Other long-term assets	216		183
		288		237
Non-Designated Hedging Instruments
Forward currency contracts	Other current assets	33		67
Total Derivative and Nonderivative Assets		$	321	$	304

Derivative and Nonderivative Liabilities:
Designated Hedging Instruments
Forward currency contracts	Other current liabilities	$	3	$	2
Forward currency contracts	Other long-term liabilities	8		3
Foreign currency-denominated debt	Other long-term liabilities	998		—
Interest rate contracts	Other current liabilities	—		44
		1,009		49
Non-Designated Hedging Instruments
Forward currency contracts	Other current liabilities	29		31
Total Derivative and Nonderivative Liabilities		$	1,037	$	80

On a recurring basis, we measure certain financial assets and financial liabilities at fair value based upon quoted market prices. Where quoted market prices or other observable inputs are not available, we apply valuation techniques to estimate fair value. FASB ASC Topic 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The category of a financial asset or a financial liability within the valuation hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy are defined as follows:



	As of
	December 31, 2019								December 31, 2018
(in millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Money market and government funds	$	50	$	—	$	—	$	50	$	13	$	—	$	—	$	13
Publicly-held securities	1		—		—		1		—		—		—		—
Hedging instruments	—		321		—		321		—		304		—		304
Licensing arrangements	—		—		518		518		—		—		—		—
	$	51	$	321	$	518	$	890	$	14	$	304	$	—	$	318
Liabilities
Hedging instruments	$	—	$	1,037	$	—	$	1,037	$	—	$	80	$	—	$	80
Contingent consideration liability	—		—		354		354		—		—		347		347
Licensing arrangements	—		—		571		571		—		—		—		—
	$	—	$	1,037	$	925	$	1,963	$	—	$	80	$	347	$	427

Our investments in money market and government funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. These investments are classified as Cash and cash equivalents within our accompanying consolidated balance sheets, in accordance with U.S. GAAP and our accounting policies. In addition to $50 million invested in money market and government funds as of December 31, 2019, we had $165 million in interest bearing and non-interest-bearing bank accounts. In addition to $13 million invested in money market and government funds as of December 31, 2018, we had $133 million in interest bearing and non-interest bearing bank accounts.

In addition, our recurring fair value measurements using Level 3 inputs relate to our licensing arrangements. In connection with our acquisition of BTG, we acquired intellectual property and related licensing arrangements, principally relating to Zytiga™, as a result of our acquisition of BTG that provides the contractual right to receive future royalty payments.

In the fourth quarter of 2019, we entered into a royalty purchase agreement with the Ontario Municipal Employees Retirement System (OMERS), whereby we sold to OMERS our remaining 50 percent of the future Zytiga™ royalty stream. The purchase price for these royalty interests consisted of an upfront cash payment of $256 million. Prior to our acquisition of BTG, BTG agreed to pay 50 percent of the Zytiga™ royalty stream, net of certain offsets, to the inventors associated with the intellectual property. As such, we do not expect to receive any future cash benefit from Zytiga™ royalties subsequent to our transaction with OMERS. In accordance with FASB ASC Topic 860, Transfers and Servicing, we are accounting for the transfer as a secured borrowing and continue to recognize the financial asset and financial liability in our consolidated balance sheets.

We have elected the fair value option to account for the licensing arrangements' financial asset and financial liability in accordance with FASB ASC Topic 825, Financial Instruments. As of December 31, 2019, we have recorded the fair values of the financial asset and financial liability using a discounted cash flow approach considering the probability-weighted expected future cash flows to be generated by the royalty stream. The fair value of the financial liability also considers the related contractual provisions that govern our payment obligations.

In connection with our preliminary purchase price allocation of BTG as of the acquisition date, the amount recognized for the financial asset was $567 million in aggregate, comprised of $195 million included in Other current assets and $373 million included in Other long-term assets. The amount recognized for the financial liability was $370 million, comprised of $54 million included in Accounts payable, $104 million included in Other current liabilities and $212 million included in Other long-term liabilities. The amounts above were valued using the fair value option with the exception of the Accounts payable, which was settled in the third quarter. During the fourth quarter, we also recorded the $256 million proceeds received from the sale of the Zytiga royalty stream as an increase in the fair value of the financial liability now accounted for as a secured borrowing, as discussed above. Refer to Note B – Acquisitions and Strategic Investments for further information on the preliminary purchase price allocation of BTG.



Licensing Arrangements	Fair Value as of December 31, 2019	Valuation Technique	Unobservable Input	Range				Weighted Average (1)
Financial Asset	$518 million	Discounted Cash Flow	Discount Rate	11	%	-	19%	19%
Financial Asset	$518 million	Discounted Cash Flow	Projected Year of Payment	2020		-	2028	2024
Financial Liability	$571 million	Discounted Cash Flow	Discount Rate	19%				19%
Financial Liability	$571 million	Discounted Cash Flow	Projected Year of Payment	2020		-	2027	2023

Significant increases or decreases in projected cash flows of the royalty stream and the related contractual provisions that govern our payment obligations, discount rates or the time until payment is made would have resulted in a significantly lower or higher fair value measurement of the licensing arrangements' financial asset and liability as of December 31, 2019. However, increases or decreases in the financial asset would be substantially offset by increases or decreases in the financial liability, as such our earnings are not subject to material gains or losses from the licensing arrangement.

We hold certain assets and liabilities that are measured at fair value on a non-recurring basis in periods after initial recognition. The fair value of a measurement alternative investment is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. Refer to Note B – Acquisitions and Strategic Investments for a discussion of our strategic investments.

The fair value of our outstanding debt obligations as of December 31, 2019 was $11.020 billion, of which $1.004 billion relates to the Euro-denominated December 2027 Notes, and as of December 31, 2018 was $7.239 billion. We determined fair value by using quoted market prices for our publicly registered senior notes, classified as Level 1 within the fair value hierarchy, and face value for commercial paper, term loans and credit facility borrowings outstanding. Refer to Note E – Contractual Obligations and Commitments for a discussion of our debt obligations.