Aggregate principal amount

  
Baker Hughes CompanyNotes to Unaudited Condensed Consolidated Financial StatementsDERIVATIVES AND HEDGINGWe use derivatives to manage our risks and do not use derivatives for speculation. The table below summarizes the fair value of all derivatives, including hedging instruments and embedded derivatives.

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|   | September 30, 2022 | December 31, 2021 |
|  | Assets | Liabilities | Assets | Liabilities |
| Derivatives accounted for as hedges |  |  |  |  |
| Currency exchange contracts | $ | —  |  | $ | (2) |  | $ | —  |  | $ | (3) |  |
| Interest rate swap contracts | —  |  | (70) |  | —  |  | (10) |  |
|  |  |  |  |  |
| Derivatives not accounted for as hedges |  |  |  |  |
| Currency exchange contracts and other | 60  |  | (47) |  | 29  |  | (36) |  |
|  |  |  |  |  |
|  |  |  |  |  |
| Total derivatives | $ | 60  |  | $ | (119) |  | $ | 29  |  | $ | (49) |  |

Derivatives are classified in the condensed consolidated statements of financial position depending on their respective maturity date. As of September 30, 2022 and December 31, 2021, $59 million and $28 million of derivative assets are recorded in "All other current assets" and $1 million and $1 million are recorded in "All other assets" in the condensed consolidated statements of financial position, respectively. As of September 30, 2022 and December 31, 2021, $46 million and $39 million of derivative liabilities are recorded in "All other current liabilities" and $73 million and $10 million are recorded in "All other liabilities" of the condensed consolidated statements of financial position, respectively.FORMS OF HEDGINGCash Flow HedgesWe use cash flow hedging primarily to reduce or eliminate the effects of foreign exchange rate changes on purchase and sale contracts. Accordingly, the vast majority of our derivative activity in this category consists of currency exchange contracts. Changes in the fair value of cash flow hedges are recorded in a separate component of equity (referred to as "Accumulated Other Comprehensive Income", or "AOCI") and are recorded in earnings in the period in which the hedged transaction occurs. See "Note 11. Equity" for further information on activity in AOCI for cash flow hedges. As of September 30, 2022 and December 31, 2021, the maximum term of derivative instruments that hedge forecasted transactions was one year.Fair Value HedgesAll of our long-term debt is comprised of fixed rate instruments. We are subject to interest rate risk on our debt portfolio and may use interest rate swaps to manage the economic effect of fixed rate obligations associated with certain debt. Under these arrangements, we agree to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount.As of September 30, 2022 and December 31, 2021, we had interest rate swaps with a notional amount of $500 million that converted a portion of our $1,350 million aggregate principal amount of 3.337% fixed rate Senior Notes due 2027 into a floating rate instrument with an interest rate based on a LIBOR index as a hedge of its exposure to changes in fair value that are attributable to interest rate risk. We concluded that the interest rate swap met the criteria necessary to qualify for the short-cut method of hedge accounting, and as such, an assumption is made that the change in the fair value of the hedged debt, due to changes in the benchmark rate, exactly offsets the change in the fair value of the interest rate swaps. Therefore, the derivative is considered to be effective at achieving offsetting changes in the fair value of the hedged liability, and no ineffectiveness is recognized. The mark-to-market of this fair value hedge is recorded as gains or losses in interest expense and is equally offset by the gain or loss of the underlying debt instrument, which also is recorded in interest expense.  Baker Hughes Company 2022 Third Quarter Form 10-Q | 18  

