Note 7—Derivative Instruments and Hedging Activities

NOTE 7—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Derivative Instruments

As part of its risk management strategy, the Company uses derivative instruments, primarily forward contracts, purchased options, and interest rate swaps to hedge certain foreign currency and interest rate exposures. The Company’s objective is to offset gains and losses resulting from these exposures with gains and losses on the derivative contracts used to hedge the exposures, thereby reducing volatility of earnings and protecting the fair values of assets and liabilities. For derivatives designated as cash flow hedges, the Company assesses hedge effectiveness both at the onset of the hedge and at regular intervals throughout the life of the derivative and recognizes any ineffective portion of the hedge in earnings as a component of interest and other, net. Hedge ineffectiveness recognized in earnings was not material during the fiscal years ended January 29, 2016 and January 30, 2015, the successor period ended January 31, 2014, and the predecessor period ended October 28, 2013.

Foreign Exchange Risk

The Company uses forward contracts and purchased options designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted transactions denominated in currencies other than the U.S. dollar. The risk of loss associated with purchased options is limited to premium amounts paid for the option contracts. The risk of loss associated with forward contracts is equal to the exchange rate differential from the time the contract is entered into until the time it is settled. The majority of these contracts typically expire in twelve months or less.

During the fiscal year ended January 29, 2016, the Company did not discontinue any cash flow hedges related to foreign exchange contracts that had a material impact on the Company’s results of operations due to the probability that the forecasted cash flows would not occur. However, as a result of the acquisition by Denali Holding, the cash flow hedges that were outstanding at the end of the predecessor period were de-designated as of October 29, 2013 due to the change in control of Dell resulting from the going-private transaction.

The Company uses forward contracts to hedge monetary assets and liabilities denominated in a foreign currency. These contracts generally expire in three months or less, are considered economic hedges, and are not designated for hedge accounting. The change in the fair value of these instruments represents a natural hedge as their gains and losses offset the changes in the underlying fair value of the monetary assets and liabilities due to movements in currency exchange rates.

In connection with the expanded offerings of Dell Financial Services in Europe, forward contracts are used to hedge financing receivables denominated in foreign currencies. The majority of these contracts expire within three years or less and are not designated for hedge accounting.

Interest Rate Risk

The Company uses interest rate swaps to hedge the variability in cash flows related to the interest rate payments on structured financing debt. The interest rate swaps economically convert the variable rate on the structured financing debt to a fixed interest rate to match the underlying fixed rate being received on fixed-term customer leases and loans. Most of the contracts expire within three years or less and are not designated for hedge accounting.

- F-33 -

DENALI HOLDING INC.

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Interest rate swaps are utilized to manage the interest rate risk, at a portfolio level, associated with Dell Financial Services operations in Europe. The interest rate swaps economically convert the fixed rate on financing receivables to a three-month Euribor floating rate basis in order to match the floating rate nature of the banks’ funding pool. Most of the contracts expire within three years or less and are not designated for hedge accounting.

Notional Amounts of Outstanding Derivative Instruments

The notional amounts of the Company’s outstanding derivative instruments were as follows as of the dates indicated:

		Successor
		January 29, 2016				January 30, 2015
		(in millions)
Foreign Exchange Contracts
Designated as cash flow hedging instruments		$	3,947			$	4,759
Non-designated as hedging instruments			985				1,219
Total		$	4,932			$	5,978
Interest Rate Contracts
Non-designated as hedging instruments		$	1,017			$	1,434
Total		$	1,017			$	1,434

Effect of Derivative Instruments on the Consolidated Statements of Financial Position and the Consolidated Statements of Income (Loss)

Derivatives in Cash Flow Hedging Relationships		Gain (Loss) Recognized in Accumulated OCI, Net of Tax, on Derivatives (Effective Portion)				Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)		Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)				Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)		Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
						(in millions)
Successor
For the fiscal year ended January 29, 2016
						Total net revenue		$	328
Foreign exchange contracts		$	152			Total cost of net revenue			40
Interest rate contracts			—			Interest and other, net			—			Interest and other, net		$	(1	)
Total		$	152					$	368					$	(1	)
For the fiscal year ended January 30, 2015
						Total net revenue		$	163
Foreign exchange contracts		$	427			Total cost of net revenue			15
Interest rate contracts			—			Interest and other, net			—			Interest and other, net		$	1
Total		$	427					$	178					$	1

- F-34 -

DENALI HOLDING INC.

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Derivative Instruments in the Consolidated Statements of Financial Position

The Company presents its foreign exchange derivative instruments on a net basis in the Consolidated Statements of Financial Position due to the right of offset by its counterparties under master netting arrangements. The fair value of those derivative instruments presented on a gross basis as of each date indicated below was as follows:

		Successor
		January 29, 2016
		Other Current Assets				Other Non- Current Assets				Other Current Liabilities				Other Non- Current Liabilities				Total Fair Value
		(in millions)
Derivatives Designated as Hedging Instruments
Foreign exchange contracts in an asset position		$	100			$	—			$	—			$	—			$	100
Foreign exchange contracts in a liability position			(11	)			—				—				—				(11	)
Net asset (liability)			89				—				—				—				89
Derivatives not Designated as Hedging Instruments
Foreign exchange contracts in an asset position			301				1				—				—				302
Foreign exchange contracts in a liability position			(198	)			—				(5	)			(3	)			(206	)
Interest rate contracts in an asset position			—				2				—				—				2
Interest rate contracts in a liability position			—				—				—				(4	)			(4	)
Net asset (liability)			103				3				(5	)			(7	)			94
Total derivatives at fair value		$	192			$	3			$	(5	)		$	(7	)		$	183
		Successor
		January 30, 2015
		Other Current Assets				Other Non- Current Assets				Other Current Liabilities				Other Non- Current Liabilities				Total Fair Value
		(in millions)
Derivatives Designated as Hedging Instruments
Foreign exchange contracts in an asset position		$	254			$	—			$	33			$	—			$	287
Foreign exchange contracts in a liability position			(8	)			—				(2	)			—				(10	)
Net asset (liability)			246				—				31				—				277
Derivatives not Designated as Hedging Instruments
Foreign exchange contracts in an asset position			556				—				36				—				592
Foreign exchange contracts in a liability position			(365	)			—				(120	)			—				(485	)
Interest rate contracts in a liability position			—				—				—				(3	)			(3	)
Net asset (liability)			191				—				(84	)			(3	)			104
Total derivatives at fair value		$	437			$	—			$	(53	)		$	(3	)		$	381

- F-35 -

DENALI HOLDING INC.

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the gross amounts of the Company’s derivative instruments, amounts offset due to master netting agreements with the Company’s various counterparties, and the net amounts recognized in the Consolidated Statements of Financial Position.

		Successor
		January 29, 2016
		Gross Amounts of Recognized Assets/ (Liabilities)				Gross Amounts Offset in the Statement of Financial Position				Net Amounts of Assets/ (Liabilities) Presented in the Statement of Financial Position				Gross Amounts not Offset in the Statement of Financial Position
														Financial Instruments				Cash Collateral Received or Pledged				Net Amount
		(in millions)
Derivative Instruments
Financial assets		$	404			$	(209	)		$	195			$	—			$	—			$	195
Financial liabilities			(221	)			209				(12	)			—				—				(12	)
Total Derivative Instruments		$	183			$	—			$	183			$	—			$	—			$	183
		Successor
		January 30, 2015
		Gross Amounts of Recognized Assets/ (Liabilities)				Gross Amounts Offset in the Statement of Financial Position				Net Amounts of Assets/ (Liabilities) Presented in the Statement of Financial Position				Gross Amounts not Offset in the Statement of Financial Position
														Financial Instruments				Cash Collateral Received or Pledged				Net Amount
		(in millions)
Derivative Instruments
Financial assets		$	879			$	(442	)		$	437			$	—			$	—			$	437
Financial liabilities			(498	)			442				(56	)			—				—				(56	)
Total Derivative Instruments		$	381			$	—			$	381			$	—			$	—			$	381