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

__________


(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

__________


(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.