|
NOTE 5 — DERIVATIVES
We use derivative instruments to manage risks related to foreign currencies, interest rates, equity prices, and credit; to enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment.
Foreign Currencies
Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions.
Foreign currency risks related to certain non-U.S. dollar-denominated investments are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments. Foreign currency risks related to certain Euro-denominated debt are hedged using foreign exchange forward contracts that are designated as cash flow hedging instruments.
In the past, option and forward contracts were used to hedge a portion of forecasted international revenue and were designated as cash flow hedging instruments. Principal currencies hedged included the Euro, Japanese yen, British pound, Canadian dollar, and Australian dollar.
Certain options and forwards not designated as hedging instruments are also used to manage the variability in foreign exchange rates on certain balance sheet amounts and to manage other foreign currency exposures.
Interest Rate
Interest rate risks related to certain fixed-rate debt are hedged using interest rate swaps that are designated as fair value hedging instruments to effectively convert the fixed interest rates to floating interest rates.
Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using exchange-traded option and futures contracts and over-the-counter swap and option contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.
Equity
Securities held in our equity investments portfolio are subject to market price risk. At times, we may hold options, futures, and swap contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.
Credit
Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.
Credit-Risk-Related Contingent Features
Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of September 30, 2020, our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be posted.
The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents:
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2020 |
|
|
June 30,
2020 |
|
|
|
|
|
|
|
|
|
|
Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts purchased |
|
$ |
635 |
|
|
$ |
635 |
|
|
Foreign exchange contracts sold |
|
|
6,844 |
|
|
|
6,754 |
|
|
Interest rate contracts purchased |
|
|
1,292 |
|
|
|
1,295 |
|
|
|
|
|
|
|
|
|
|
|
|
Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts purchased |
|
|
11,935 |
|
|
|
11,896 |
|
|
Foreign exchange contracts sold |
|
|
10,903 |
|
|
|
15,595 |
|
|
Other contracts purchased |
|
|
2,202 |
|
|
|
1,844 |
|
|
Other contracts sold |
|
|
749 |
|
|
|
757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivative Instruments
The following table presents our derivative instruments:
|
|
|
Derivative |
|
|
|
Derivative |
|
|
Derivative |
|
|
Derivative |
|
|
(In millions) |
|
Assets |
|
|
|
Liabilities |
|
|
Assets |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2020 |
|
|
June 30,
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
16 |
|
|
$ |
(67 |
) |
|
$ |
44 |
|
|
$ |
(54 |
) |
|
Interest rate contracts |
|
|
89 |
|
|
|
0 |
|
|
|
93 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
|
165 |
|
|
|
(247 |
) |
|
|
245 |
|
|
|
(334 |
) |
|
Other contracts |
|
|
6 |
|
|
|
(27 |
) |
|
|
18 |
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross amounts of derivatives |
|
|
276 |
|
|
|
(341 |
) |
|
|
400 |
|
|
|
(399 |
) |
|
Gross amounts of derivatives offset in the balance sheet |
|
|
(74 |
) |
|
|
76 |
|
|
|
(154 |
) |
|
|
158 |
|
|
Cash collateral received |
|
|
0 |
|
|
|
(58 |
) |
|
|
0 |
|
|
|
(154 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts of derivatives |
|
$ |
202 |
|
|
$ |
(323 |
) |
|
$ |
246 |
|
|
$ |
(395
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
$ |
28 |
|
|
$ |
0 |
|
|
$ |
35 |
|
|
$ |
0 |
|
|
Other current assets |
|
|
81 |
|
|
|
0 |
|
|
|
199 |
|
|
|
0 |
|
|
Other long-term assets |
|
|
93 |
|
|
|
0 |
|
|
|
12 |
|
|
|
0 |
|
|
Other current liabilities |
|
|
0 |
|
|
|
(232 |
) |
|
|
0 |
|
|
|
(334 |
) |
|
Other long-term liabilities |
|
|
0 |
|
|
|
(91 |
) |
|
|
0 |
|
|
|
(61 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
202 |
|
|
$ |
(323 |
) |
|
$ |
246 |
|
|
$ |
(395 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $274 million and $340 million, respectively, as of September 30, 2020, and $399 million and $399 million, respectively, as of June 30, 2020.
The following table presents the fair value of our derivatives instruments on a gross basis:
|
(In millions) |
|
Level 1 |
|
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
$ |
0 |
|
|
$ |
275 |
|
|
$ |
1 |
|
|
$ |
276 |
|
|
Derivative liabilities |
|
|
0 |
|
|
|
(341 |
) |
|
|
0 |
|
|
|
(341 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
|
1 |
|
|
|
398 |
|
|
|
1 |
|
|
|
400 |
|
|
Derivative liabilities |
|
|
0 |
|
|
|
(399 |
) |
|
|
0 |
|
|
|
(399 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on derivative instruments recognized in our consolidated income statements were as follows:
|
(In millions) |
|
Revenue |
|
|
Other Income
(Expense), Net |
|
|
Revenue |
|
|
Other Income
(Expense), Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated as Fair Value Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
$ |
0 |
|
|
$ |
(169 |
) |
|
$ |
0 |
|
|
$ |
30 |
|
|
Hedged items |
|
|
0 |
|
|
|
168 |
|
|
|
0 |
|
|
|
(33 |
) |
|
Excluded from effectiveness assessment |
|
|
0 |
|
|
|
8 |
|
|
|
0 |
|
|
|
41 |
|
|
Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1 |
|
|
Hedged items |
|
|
0 |
|
|
|
4 |
|
|
|
0 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated as Cash Flow Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from accumulated other comprehensive income |
|
|
0 |
|
|
|
20 |
|
|
|
0 |
|
|
|
(5 |
) |
|
Excluded from effectiveness assessment |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
|
0 |
|
|
|
58 |
|
|
|
0 |
|
|
|
(171 |
) |
|
Other contracts |
|
|
0 |
|
|
|
4 |
|
|
|
0 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows:
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Designated as Cash Flow Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
Included in effectiveness assessment |
|
$ |
20 |
|
|
$ |
(6 |
) |
|
|
|
|
|
|
|
|
