Understanding Derivative Instruments

1. What is the difference between derivatives designated as hedging instruments and derivatives not designated as hedging instruments?

2. When would a derivative be designated as a hedging instrument. When would a derivative not be able to be a hedging instrument?

Picture below for reference

Balance Sheet Effect of Derivative Financial Instruments Derivative assets and liabilities are recorded on the balance sheet at fair value and are presented on a gross basis The notional amounts of the derivative instruments do not necessarily represent amounts exchanged by the parties and are not a direct measure of our financial allow for netting of exposures in the event of default or breach of the counterparty agreement. l exposure. We also enter into master agreements with counterparties that may The fair value of our derivative instruments and the associated notional amounts, presented gross, at December 31 were as follows (in millions): 2016 2017 Fair Value of Assets Fair Value of Liabilities Fair Value of Liabilities Fair Value of Cash flow hedges 407 S Foreign currency exchange contracts $ Fair value hedges 19,091 S 620 $ 257 $ 19,595 $ 306 Interest rate contracts 33,175 80 28,008 248 135 Derivatives not designated as hedging instruments 194 Foreign curency exchange contracts Cross-curency interest rate swap Interest rate contracts Commodity contracts 17,227 379 20,679 3,201 61,689 531 242 156 4,006 60,504 660 28 137 74 37 Total derivative financial instruments, gross (a) (b) $ 134,914S 1,895 $ 619 $ 133,452 $ 1,548 S 912 1,108 $ 371 Current portion Non-current portion 568 802 S 746 Total derivative financial instruments, 1,895 $ 619 1,548 S 912 (a) (b) At December 31, 2016 and 2017, we held collateral of $15 million, and we posted collateral of $12 million and $38 million, respectively. At December 31, 2016 and 2017, the fair value of assets and liabilities available for counterparty netting was $554 million and $618 million, respectively. All derivatives are categorized within Level 2 of the fair value hierarchy