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Derivative Financial Instruments and Hedging Activities
 3 Months Ended
Jun. 30, 2012
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

In the normal course of business, our operations are exposed to global market risks, including the effect of changes in foreign currency exchange rates, certain commodity prices, and interest rates. To manage these risks, we enter into various derivatives contracts:

•
Foreign currency exchange contracts that are used to manage foreign exchange exposure;
•
Commodity contracts, including forwards and options, that are used to manage commodity price risk;
•
Interest rate contracts including swaps, caps, and floors that are used to manage the effects of interest rate fluctuations; and
•
Cross-currency interest rate swap contracts that are used to manage foreign currency and interest rate exposures on foreign-denominated debt.
 
Our derivatives are over-the-counter customized derivative transactions and are not exchange-traded. We review our hedging program, derivative positions, and overall risk management strategy on a regular basis.

Derivative Financial Instruments and Hedge Accounting. All derivatives are recognized on the balance sheet at fair value. We do not net our derivative position by counterparty for purposes of balance sheet presentation and disclosure. We do, however, consider our net position for determining fair value.
 
We have elected to apply hedge accounting to certain derivatives. Derivatives that are designated in hedging relationships are evaluated for effectiveness using regression analysis at the time they are designated and throughout the hedge period. Cash flows and the profit impact associated with designated hedges are reported in the same category as the underlying hedged item.
 
Some derivatives do not qualify for hedge accounting; for others, we elect not to apply hedge accounting. Regardless, we only enter into transactions that we believe will be highly effective at offsetting the underlying economic risk. We report changes in the fair value of derivatives not designated as hedging instruments through Automotive cost of sales, Automotive interest income and other non-operating income/(expense), net, or Financial Services other income/(loss), net depending on the sector and underlying exposure. Cash flows associated with non-designated or de-designated derivatives are reported in Net cash provided by/(used in) investing activities in our statements of cash flows.

Cash Flow Hedges. Our Automotive sector has designated certain forward contracts as cash flow hedges of forecasted transactions with exposure to foreign currency exchange risk.

The effective portion of changes in the fair value of cash flow hedges is deferred in Accumulated other comprehensive income/(loss) and is recognized in Automotive cost of sales when the hedged item affects earnings. The ineffective portion is reported in Automotive cost of sales. Our policy is to de-designate cash flow hedges prior to the time forecasted transactions are recognized as assets or liabilities on the balance sheet and report subsequent changes in fair value through Automotive cost of sales. If it becomes probable that the originally-forecasted transaction will not occur, the related amount also is reclassified from Accumulated other comprehensive income/(loss) and recognized in earnings. The majority of our cash flow hedges mature in two years or less.

Fair Value Hedges. Our Financial Services sector uses derivatives to reduce the risk of changes in the fair value of liabilities. We have designated certain receive-fixed, pay-float interest rate swaps as fair value hedges of fixed-rate debt. The risk being hedged is the risk of changes in the fair value of the hedged debt attributable to changes in the benchmark interest rate. If the hedge relationship is deemed to be highly effective, we record the changes in the fair value of the hedged debt related to the risk being hedged in Financial Services debt with the offset in Financial Services other income/(loss), net. The change in fair value of the related derivative (excluding accrued interest) also is recorded in Financial Services other income/(loss), net. Consequently, hedge ineffectiveness (the difference between the change in fair value of the derivative and the change in the value of the hedged debt that is attributable to the changes in the benchmark interest rate) is reflected in Financial Services other income/(loss), net.

NOTE 12.  DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

For our Financial Services sector, net interest settlements and accruals on fair value hedges are excluded from the assessment of hedge effectiveness. We report net interest settlements and accruals on fair value hedges in Interest expense, with the exception of foreign currency revaluation on accrued interest, which is reported in Selling, administrative, and other expenses. Ineffectiveness on fair value hedges and gains and losses on interest rate contracts not designated as hedging instruments are reported in Financial Services other income/(loss), net. Gains and losses on foreign exchange and cross-currency interest rate swap contracts not designated as hedging instruments are reported in Selling, administrative, and other expenses. The cash flows associated with fair value hedges are reported in Net cash provided by/(used in) operating activities on our statement of cash flows.
 
When a fair value hedge is de-designated, or when the derivative is terminated before maturity, the fair value adjustment to the hedged debt continues to be reported as part of the carrying value of the debt and is amortized over its remaining life.
 
Net Investment Hedges. We have used foreign currency exchange derivatives to hedge the net assets of certain foreign entities to offset the translation and economic exposures related to our investment in these entities. The effective portion of changes in the value of designated instruments is included in Accumulated other comprehensive income/(loss) as a foreign currency translation adjustment until the hedged investment is sold or liquidated. When the investment is sold or liquidated, the hedge gains and losses previously reported in Accumulated other comprehensive income/(loss) are recognized in Automotive interest income and other non-operating income/(expense), net as part of the gain or loss on sale. Presently, we have had no derivative instruments in an active net investment hedging relationship. We have elected the spot-to-spot method.

Normal Purchases and Normal Sales Classification. We have elected to apply the normal purchases and normal sales classification for physical supply contracts that are entered into for the purpose of procuring commodities to be used in production over a reasonable period in the normal course of our business.

NOTE 12.  DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

Income Effect of Derivative Financial Instruments

The following tables summarize by hedge designation the pre-tax gains/(losses) recorded in Other comprehensive income/(loss) ("OCI"), reclassified from Accumulated other comprehensive income/(loss) ("AOCI") to income and/or recognized directly in income for the periods ended June 30 (in millions):
 
Second Quarter 2012
 
First Half 2012
 
Gain/(Loss) Recorded
in OCI
 
Gain/(Loss)
Reclassified
from AOCI
to Income
 
Gain/(Loss) Recognized
in Income
 
Gain/(Loss) Recorded
in OCI
 
Gain/(Loss)
Reclassified
from AOCI
to Income
 
Gain/(Loss) Recognized
in Income
Automotive Sector
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
$
(222
)
 
$
(98
)
 
$
(1
)
 
$
(369
)
 
$
(150
)
 
$
—

Derivatives not designated as hedging instruments
 

 
 

 
 

 
 

 
 

 
 

Foreign currency exchange contracts - operating exposures
 

 
 

 
$
(8
)
 
 

 
 

 
$
(35
)
Commodity contracts
 

 
 

 
(186
)
 
 

 
 

 
(115
)
Other – warrants
 

 
 

 
—

 
 

 
 

 
(4
)
Total
 

 
 

 
$
(194
)
 
 

 
 

 
$
(154
)
 
 
 
 
 
 
 
 
 
 
 
 
Financial Services Sector
 

 
 

 
 

 
 

 
 

 
 

Fair value hedges
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
 

 
 

 
 

 
 

 
 

 
 

Net interest settlements and accruals excluded from the assessment of hedge effectiveness
 

 
 

 
$
41

 
 

 
 

 
$
82

Ineffectiveness (a)
 

 
 

 
1

 
 

 
 

 
2

Total
 

 
 

 
$
42

 
 

 
 

 
$
84

Derivatives not designated as hedging instruments
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
 

 
 

 
$
—

 
 

 
 

 
$
(4
)
Foreign currency exchange contracts
 

 
 

 
(6
)
 
 

 
 

 
(54
)
Cross-currency interest rate swap contracts
 

 
 

 
—

 
 

 
 

 
(48
)
Other (b)
 

 
 

 
(43
)
 
 

 
 

 
(81
)
Total
 

 
 

 
$
(49
)
 
 

 
 

 
$
(187
)
 __________
(a)
For the second quarter and first half of 2012, hedge ineffectiveness reflects change in fair value on derivatives of $238 million gain and $158 million gain, respectively, and change in fair value on hedged debt of $237 million loss and $156 million loss, respectively.
(b)
Reflects gains/(losses) for derivative features included in the FUEL Notes (see Note 3).


















NOTE 12.  DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

 
Second Quarter 2011
 
First Half 2011
 
Gain/(Loss) Recorded
in OCI
 
Gain/(Loss)
Reclassified
from AOCI
to Income
 
Gain/(Loss) Recognized
in Income
 
Gain/(Loss) Recorded
in OCI
 
Gain/(Loss)
Reclassified
from AOCI
to Income
 
Gain/(Loss) Recognized
in Income
Automotive Sector
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
$
69

 
$
42

 
$
2

 
$
194

 
$
36

 
$
2

Derivatives not designated as hedging instruments
 

 
 

 
 

 
 

 
 

 
 

Foreign currency exchange contracts - operating exposures
 

 
 

 
$
4

 
 

 
 

 
$
13

Commodity contracts
 

 
 

 
(27
)
 
 

 
 

 
(12
)
Other – warrants
 

 
 

 
1

 
 

 
 

 
1

Total
 

 
 

 
$
(22
)
 
 

 
 

 
$
2

 
 
 
 
 
 
 
 
 
 
 
 
Financial Services Sector
 

 
 

 
 

 
 

 
 

 
 

Fair value hedges
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
 

 
 

 
 

 
 

 
 

 
 

Net interest settlements and accruals excluded from the assessment of hedge effectiveness
 

 
 

 
$
67

 
 

 
 

 
$
133

Ineffectiveness (a)
 

 
 

 
2

 
 

 
 

 
(16
)
Total
 

 
 

 
$
69

 
 

 
 

 
$
117

Derivatives not designated as hedging instruments
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
 

 
 

 
$
4

 
 

 
 

 
$
(4
)
Foreign currency exchange contracts
 

 
 

 
(49
)
 
 

 
 

 
(37
)
Cross-currency interest rate swap contracts
 

 
 

 
(17
)
 
 

 
 

 
(31
)
Other (b)
 

 
 

 
2

 
 

 
 

 
2

Total
 

 
 

 
$
(60
)
 
 

 
 

 
$
(70
)
 __________
(a)
For the second quarter and first half of 2011, hedge ineffectiveness reflects change in fair value on derivatives of $134 million gain and $46 million gain, respectively, and change in fair value on hedged debt of $132 million loss and $62 million loss, respectively.
(b)
Reflects gains/(losses) for derivative features included in the FUEL Notes (see Note 3).



NOTE 12.  DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

Balance Sheet Effect of Derivative Financial Instruments

The following table summarizes the notional amount and estimated fair value of our derivative financial instruments (in millions):
 
June 30, 2012
 
December 31, 2011
 
Notionals
 
Fair Value of
Assets
 
Fair Value of
Liabilities
 
Notionals
 
Fair Value of
Assets
 
Fair Value of
Liabilities
Automotive Sector
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
$
15,717

 
$
62

 
$
502

 
$
14,535

 
$
120

 
$
368

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
5,746

 
66

 
73

 
5,692

 
92

 
80

Commodity contracts
2,033

 
3

 
335

 
2,396

 
2

 
372

Other – warrants
12

 
—

 
—

 
12

 
4

 
—

Total derivatives not designated as hedging instruments
7,791

 
69

 
408

 
8,100

 
98

 
452

Total Automotive sector derivative financial instruments
$
23,508

 
$
131

 
$
910

 
$
22,635

 
$
218

 
$
820

 
 
 
 
 
 
 
 
 
 
 
 
Financial Services Sector
 

 
 

 
 

 
 
 
 
 
 
Fair value hedges
 

 
 

 
 

 
 
 
 
 
 
Interest rate contracts
$
12,793

 
$
708

 
$
—

 
$
7,786

 
$
526

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
60,289

 
608

 
254

 
70,639

 
670

 
237

Foreign currency exchange contracts
2,452

 
15

 
13

 
3,582

 
30

 
50

Cross-currency interest rate swap contracts
2,579

 
5

 
32

 
987

 
12

 
12

Other (a)
—

 
—

 
—

 
2,500

 
137

 
—

Total derivatives not designated as hedging instruments
65,320

 
628

 
299

 
77,708

 
849

 
299

Total Financial Services sector derivative financial instruments
$
78,113

 
$
1,336

 
$
299

 
$
85,494

 
$
1,375

 
$
299

 __________
(a)
Represents derivative features included in the FUEL Notes (see Note 3). The derivative features included in the FUEL Notes were extinguished as a result of the mandatory exchange of the FUEL Notes to unsecured notes in the second quarter of 2012.
 
On our consolidated balance sheet, derivative assets are reported in Other assets for Automotive and Financial Services sectors, and derivative liabilities are reported in Payables for our Automotive sector and in Accrued liabilities and deferred revenue for our Financial Services sector.

The notional amounts of the derivative financial instruments do not represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the financial risks described above. Notional amounts are presented on a gross basis with no netting of offsetting exposure positions. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the derivatives, such as interest rates, foreign currency exchange rates or commodity volumes and prices.


NOTE 12.  DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

Counterparty Risk and Collateral

Use of derivatives exposes us to the risk that a counterparty may default on a derivative contract. We establish exposure limits for each counterparty to minimize this risk and provide counterparty diversification. Substantially all of our derivative exposures are with counterparties that have an investment grade rating. The aggregate fair value of derivative instruments in asset positions on June 30, 2012 was $1.5 billion, representing the maximum loss that we would recognize at that date if all counterparties failed to perform as contracted. We enter into master agreements with counterparties that generally allow for netting of certain exposures; therefore, the actual loss we would recognize if all counterparties failed to perform as contracted would be lower.

We include an adjustment for non-performance risk in the fair value of derivative instruments. Our adjustment for non-performance risk is relative to a measure based on an unadjusted inter-bank deposit rate (e.g., LIBOR). For our Automotive sector, at June 30, 2012 and December 31, 2011, our adjustment decreased derivative assets by $1 million and $3 million, respectively, and decreased derivative liabilities by $5 million and $10 million, respectively. For our Financial Services sector, at June 30, 2012 and December 31, 2011, our adjustment decreased derivative assets by $47 million and $54 million, respectively, and decreased derivative liabilities by $4 million and $7 million, respectively. See Note 3 for more detail on valuation methodologies.

We post cash collateral with certain counterparties based on our net position with regard to foreign currency and commodity derivative contracts. We posted $123 million and $70 million as of June 30, 2012 and December 31, 2011, respectively, which is reported in Other assets on our consolidated balance sheet.