Maximum exposure to credit risk in the event of non performance by counterparties, gross fair value of contracts in asset positions

[Table of Contents](#i2ba0bd92bcb14d27a1d59d9667569d45_7)THE ESTÉE LAUDER COMPANIES INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCash Flow HedgesThe Company enters into foreign currency forward contracts, and may enter into foreign currency option contracts, to hedge anticipated transactions and receivables and payables denominated in foreign currencies, for periods consistent with the Company’s identified exposures. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on the cash flows that the Company receives from foreign subsidiaries. The foreign currency forward contracts entered into to hedge anticipated transactions have been designated as cash flow hedges and have varying maturities through the end of March 2024. Hedge effectiveness of the foreign currency forward contracts is based on the forward method, which includes time value in the effectiveness assessment. At June 30, 2022, the Company had cash flow hedges outstanding with a notional amount totaling $1,405 million.The Company may enter into interest rate forward contracts to hedge anticipated issuance of debt for periods consistent with the Company’s identified exposures. The purpose of the hedging activities is to minimize the effect of interest rate movements on the cost of debt issuance.For hedge contracts that are no longer deemed highly effective, hedge accounting is discontinued and gains and losses in AOCI are reclassified to sales when the underlying forecasted transaction occurs. If it is probable that the forecasted transaction will no longer occur, then any gains or losses in AOCI are reclassified to current-period sales. As of June 30, 2022, the Company’s foreign currency cash flow hedges were highly effective.The estimated net gain on the Company’s derivative instruments designated as cash flow hedges as of June 30, 2022 that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $36 million. The accumulated net gain (loss) on derivative instruments in AOCI was $90 million and $(1) million as of June 30, 2022 and 2021, respectively.  
Fair Value Hedges  
The Company enters into interest rate derivative contracts to manage the exposure to interest rate fluctuations on its funded indebtedness. The Company has interest rate swap agreements, with notional amounts totaling $250 million, $700 million and $300 million to effectively convert the fixed rate interest on its 2022 Senior Notes, 2030 Senior Notes and 2031 Senior Notes, respectively, to variable interest rates based on three-month LIBOR plus a margin. These interest rate swap agreements are designated as fair value hedges of the related long-term debt, and the changes in the fair value of the interest rate swap agreements are exactly offset by the change in the fair value of the underlying long-term debt.  
Net Investment Hedges  
The Company enters into foreign currency forward contracts, designated as net investment hedges, to hedge a portion of its net investment in certain foreign operations. The net gain or loss on these contracts is recorded within translation adjustments, as a component of AOCI on the Company’s consolidated balance sheets. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on the Company’s net investment in these foreign operations. The net investment hedge contracts have varying maturities through the end of July 2022. Hedge effectiveness of the net investment hedge contracts is based on the spot method. At June 30, 2022, the Company had net investment hedges outstanding with a notional amount totaling $1,372 million.  
Credit RiskAs a matter of policy, the Company enters into derivative contracts only with counterparties that have a long-term credit rating of at least A- or higher by at least two nationally recognized rating agencies. The counterparties to these contracts are major financial institutions. Exposure to credit risk in the event of nonperformance by any of the counterparties is limited to the gross fair value of contracts in asset positions, which totaled $215 million at June 30, 2022. To manage this risk, the Company has strict counterparty credit guidelines that are continually monitored. Accordingly, management believes risk of loss under these hedging contracts is remote.  
  
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