v3.25.2
Derivative Financial Instruments and Risk Management
 6 Months Ended
Jun. 30, 2025
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments and Risk Management Derivative Financial Instruments and Risk Management
Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates and interest rates. Our Risk Management Policy (“policy”) allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate and interest rate exposures. Our policy specifies that derivatives are not to be used for speculative purposes. Derivatives that we use are primarily foreign currency forward, option and cross currency contracts and interest rate contracts. Our derivative activities are subject to the management, direction and control of our senior financial officers. We present at least annually to our Board of Directors and the Audit Committee of the Caterpillar Board of Directors on our risk management practices, including our use of derivative financial instruments.

We recognize all derivatives at their fair value in the Consolidated Statements of Financial Position. On the date the derivative contract is entered into, the derivative instrument is (1) designated as a hedge of the fair value of a recognized asset or liability (fair value hedge), (2) designated as a hedge of a forecasted transaction or the variability of cash flows (cash flow hedge) or (3) undesignated. We record in current earnings changes in the fair value of a derivative that is qualified, designated and highly effective as a fair value hedge, along with the gain or loss on the hedged recognized asset or liability that is attributable to the hedged risk. For foreign exchange contracts designated as fair value hedges, the interim settlements are excluded from the effectiveness assessment and are recognized under a systematic and rational method over the life of the hedging instrument within Interest expense. We record in Accumulated other comprehensive income (loss) (AOCI) changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge, to the extent effective, in the Consolidated Statements of Financial Position until we reclassify them to earnings in the same period or periods during which the hedged transaction affects earnings. We report changes in the fair value of undesignated derivative instruments in current earnings. We classify cash flows from designated derivative financial instruments within the same category as the item being hedged in the Consolidated Statements of Cash Flows. We include cash flows from undesignated derivative financial instruments in the investing category in the Consolidated Statements of Cash Flows.
 
We formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value hedges to specific assets and liabilities in the Consolidated Statements of Financial Position and linking cash flow hedges to specific forecasted transactions or variability of cash flow.
We also formally assess, both at the hedge’s inception and on an ongoing basis, whether the designated derivatives that are used in hedging transactions are highly effective in offsetting changes in fair value or cash flow of hedged items. When a derivative is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable, we discontinue hedge accounting prospectively, in accordance with the derecognition criteria for hedge accounting.

Foreign currency exchange rate risk
We have balance sheet positions and expected future transactions denominated in foreign currencies, thereby creating exposure to movements in exchange rates. In managing foreign currency risk, our objective is to minimize earnings volatility resulting from conversion and the remeasurement of net foreign currency balance sheet positions and future transactions denominated in foreign currencies. Our policy allows the use of foreign currency forward, option and cross currency contracts to offset the risk of currency mismatch between our assets and liabilities and exchange rate risk associated with future transactions denominated in foreign currencies. Our foreign currency forward and option contracts are primarily undesignated. We designate fixed-to-fixed cross currency contracts as cash flow hedges to protect against movements in exchange rates on foreign currency fixed-rate assets and liabilities. We designate float-to-float cross currency contracts as fair value hedges to protect against movements in exchange rates on floating-rate assets and liabilities.
 
Interest rate risk
Interest rate movements create a degree of risk by affecting the amount of our interest payments and the value of our fixed-rate debt. Our practice is to use interest rate contracts to manage our exposure to interest rate changes.
 
We have a match-funding policy that addresses interest rate risk by aligning the interest rate profile (fixed or floating rate and duration) of our debt portfolio with the interest rate profile of our finance receivables portfolio within predetermined ranges on an ongoing basis. In connection with that policy, we use interest rate derivative instruments to modify the debt structure to match assets within the finance receivables portfolio. This matched funding reduces the volatility of margins between interest-bearing assets and interest-bearing liabilities, regardless of which direction interest rates move.

Our policy allows us to use fixed-to-floating, floating-to-fixed and floating-to-floating interest rate contracts to meet the match-funding objective. We designate fixed-to-floating interest rate contracts as fair value hedges to protect debt against changes in fair value due to changes in the benchmark interest rate. We designate most floating-to-fixed interest rate contracts as cash flow hedges to protect against the variability of cash flows due to changes in the benchmark interest rate. We have, at certain times, liquidated fixed-to-floating and floating-to-fixed interest rate contracts. We amortize the gains or losses associated with these contracts at the time of liquidation into earnings over the remaining term of the previously designated hedged item.

The location and fair value of derivative instruments reported in the Consolidated Statements of Financial Position were as follows:
(Millions of dollars)June 30, 2025December 31, 2024
Assets1
Liabilities2
Assets1
Liabilities2
Designated derivatives
Foreign exchange contracts$267 $(133)$228 $(89)
Interest rate contracts60 (15)10 (31)
$327 $(148)$238 $(120)
Undesignated derivatives
Foreign exchange contracts$11 $(79)$84 $(19)
$11 $(79)$84 $(19)
(1)    Assets are classified in the Consolidated Statements of Financial Position as Other assets.
(2)    Liabilities are classified in the Consolidated Statements of Financial Position as Accrued expenses.

The total notional amount of our derivative instruments was $18.36 billion and $15.97 billion as of June 30, 2025 and December 31, 2024, respectively. The notional amounts of derivative financial instruments do not represent amounts exchanged by the parties. We calculate the amounts exchanged by the parties by referencing the notional amounts and by other terms of the derivatives, such as foreign currency exchange rates and interest rates.
Gains (Losses) on derivative instruments are categorized as follows:
(Millions of dollars)Three Months Ended June 30,
Gains (Losses)
Recognized1
Gains (Losses)
Recognized in AOCI
Gains (Losses)
Reclassified from AOCI2
202520242025202420252024
Cash Flow Hedges
Foreign exchange contracts$— $— $67 $70 $74 $61 
Interest rate contracts— — (1)4 1 14 
Fair Value Hedges
Foreign exchange contracts— — (2)— (1)— 
Interest rate contracts(9)(21)— — — — 
Undesignated Hedges
Foreign exchange contracts(132)43 — — — — 
Total$(141)$22 $64 $74 $74 $75 
Six Months Ended June 30,
Gains (Losses)
Recognized1
Gains (Losses)
Recognized in AOCI
Gains (Losses)
Reclassified from AOCI2
202520242025202420252024
Cash Flow Hedges
Foreign exchange contracts$— $— $63 $167 $82 $156 
Interest rate contracts— — (3)15 2 30 
Fair Value Hedges
Foreign exchange contracts— — (2)— (1)— 
Interest rate contracts(16)(41)— — — — 
Undesignated Hedges
Foreign exchange contracts(166)80 — — — — 
Total$(182)$39 $58 $182 $83 $186 
(1)    Foreign exchange contract gains (losses) are included in Other income (expense). Interest rate contract gains (losses) are included in Interest expense.
(2)    Foreign exchange contract gains (losses) are primarily included in Other income (expense). Interest rate contract gains (losses) are included in Interest expense.

Amounts recorded in the Consolidated Statements of Financial Position related to cumulative basis adjustments for fair value hedges were as follows:
(Millions of dollars)Carrying Value of
the Hedged Liabilities		Cumulative Amount of Fair Value
Hedging Adjustment Included in the
Carrying Value of the Hedged
Liabilities
June 30, 2025December 31, 2024June 30, 2025December 31, 2024
Current maturities of long-term debt$1,096 $483 $(1)$(16)
Long-term debt3,253 3,247 53 — 
Total$4,349 $3,730 $52 $(16)
As of June 30, 2025, $25 million of deferred net losses, net of tax, included in equity (AOCI in the Consolidated Statements of Financial Position), related to our cash flow hedges, are expected to be reclassified to earnings over the next twelve months. The actual amount recorded in earnings will vary based on interest rates and exchange rates at the time the hedged transactions impact earnings.

We enter into International Swaps and Derivatives Association master netting agreements that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement generally permits us or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions. The master netting agreements may also provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event. Our exposure to credit loss in the event of nonperformance by the counterparties is limited to only those gains that we have recorded, but for which we have not yet received cash payment.

Collateral is typically not required of the counterparties or us under the master netting agreements. As of June 30, 2025 and December 31, 2024, no cash collateral was received or pledged under the master netting agreements.
    
The effects of net settlement provisions of the master netting agreements on our derivative balances upon an event of default or a termination event were as follows:
(Millions of dollars)June 30, 2025December 31, 2024
AssetsLiabilitiesAssetsLiabilities
Gross amounts recognized$338 $(227)$322 $(139)
Financial instruments not offset(127)127 (54)54 
Net amount$211 $(100)$268 $(85)