| 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 highly effective derivative contracts. 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. Some derivatives do not qualify for hedge accounting; for others, we elect not to apply hedge accounting.
Income Effect of Derivative Financial Instruments
The gains/(losses), by hedge designation, recorded in income for the periods ended June 30 were as follows (in millions): | | | | | | | | | | | | | | | | | | Second Quarter | | First Half | | 2017 | | 2018 | | 2017 | | 2018 | Cash flow hedges (a) | | | | | | | | Reclassified from AOCI to Cost of sales | $ | 124 |
| | $ | (12 | ) | | $ | 242 |
| | $ | 5 |
| Fair value hedges | | | | | | | | Interest rate contracts | | | | | | | | Net interest settlements and accruals on hedging instruments | 62 |
| | (2 | ) | | 132 |
| | 24 |
| Fair value changes on hedging instruments (b) | 34 |
| | (90 | ) | | (55 | ) | | (429 | ) | Fair value changes on hedged debt (b) | (30 | ) | | 82 |
| | 55 |
| | 411 |
| Derivatives not designated as hedging instruments | | | | | | | | Foreign currency exchange contracts (c) | (218 | ) | | 416 |
| | (426 | ) | | 300 |
| Cross-currency interest rate swap contracts | 16 |
| | (125 | ) | | 74 |
| | (183 | ) | Interest rate contracts | 30 |
| | (20 | ) | | 37 |
| | (37 | ) | Commodity contracts | (10 | ) | | 8 |
| | 32 |
| | (38 | ) | Total | $ | 8 |
| | $ | 257 |
| | $ | 91 |
| | $ | 53 |
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__________ | | (a) | For the second quarter and first half of 2017, a $318 million gain and a $206 million gain, respectively, were recorded in Other comprehensive income. For the second quarter and first half of 2018, a $60 million gain and a $121 million gain, respectively, were recorded in Other comprehensive income. |
| | (b) | For the first half of 2017, the fair value changes on hedging instruments and on hedged debt were recorded in Other income/(loss), net; effective first quarter 2018, these amounts were recorded in Ford Credit interest, operating, and other expenses. |
| | (c) | For the second quarter and first half of 2017, a $61 million loss and a $90 million loss were recorded in Other income/(loss), net and a $157 million loss and a $336 million loss were recorded in Cost of sales, respectively. For the second quarter and first half of 2018, a $110 million gain and a $98 million gain were recorded in Other income/(loss), net and a $306 million gain and a $202 million gain were recorded in Cost of sales, respectively. |
NOTE 15. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
Balance Sheet Effect of Derivative Financial Instruments
Derivative assets and liabilities are recorded on our consolidated balance sheet at fair value and are presented on a gross basis. The notional amounts of the derivative instruments do not necessarily represent amounts exchanged by the parties and are not a direct measure of our financial exposure. We also enter into master agreements with counterparties that may allow for netting of exposures in the event of default or breach of the counterparty agreement. Collateral represents cash received or paid under reciprocal arrangements that we have entered into with our derivative counterparties which we do not use to offset our derivative assets and liabilities.
The fair value of our derivative instruments and the associated notional amounts, presented gross, were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | June 30, 2018 | | Notional | | Fair Value of Assets | | Fair Value of Liabilities | | Notional | | Fair Value of Assets | | Fair Value of Liabilities | Cash flow hedges | | | | | | | | | | | | Foreign currency exchange contracts | $ | 19,595 |
| | $ | 407 |
| | $ | 306 |
| | $ | 17,640 |
| | $ | 309 |
| | $ | 111 |
| Fair value hedges | |
| | |
| | |
| | | | | | | Interest rate contracts | 28,008 |
| | 248 |
| | 135 |
| | 26,033 |
| | 137 |
| | 441 |
| Derivatives not designated as hedging instruments | | | | | | | | | | | Foreign currency exchange contracts | 20,679 |
| | 172 |
| | 302 |
| | 19,644 |
| | 297 |
| | 103 |
| Cross-currency interest rate swap contracts | 4,006 |
| | 408 |
| | 28 |
| | 5,852 |
| | 270 |
| | 143 |
| Interest rate contracts | 60,504 |
| | 276 |
| | 137 |
| | 65,447 |
| | 247 |
| | 255 |
| Commodity contracts | 660 |
| | 37 |
| | 4 |
| | 663 |
| | 12 |
| | 26 |
| Total derivative financial instruments, gross (a) (b) | $ | 133,452 |
| | $ | 1,548 |
| | $ | 912 |
| | $ | 135,279 |
| | $ | 1,272 |
| | $ | 1,079 |
| | | | | | | | | | | | | Current portion | | | $ | 802 |
| | $ | 568 |
| | | | $ | 766 |
| | $ | 460 |
| Non-current portion | | | 746 |
| | 344 |
| | | | 506 |
| | 619 |
| Total derivative financial instruments, gross | | | $ | 1,548 |
| | $ | 912 |
| | | | $ | 1,272 |
| | $ | 1,079 |
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__________ | | (a) | At December 31, 2017 and June 30, 2018, we held collateral of $15 million and $9 million, and we posted collateral of $38 million and $56 million, respectively. |
| | (b) | At December 31, 2017 and June 30, 2018, the fair value of assets and liabilities available for counterparty netting was $618 million and $401 million, respectively. All derivatives are categorized within Level 2 of the fair value hierarchy. |
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