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 September 30 were as follows (in millions):



	Third Quarter						First Nine Months
	2017			2018			2017			2018
Cash flow hedges (a)
Reclassified from AOCI to Cost of sales	$	115		$	45		$	357		$	50
Fair value hedges
Interest rate contracts
Net interest settlements and accruals on hedging instruments	50			(5		)	182			19
Fair value changes on hedging instruments (b)	(40		)	(102		)	(95		)	(531		)
Fair value changes on hedged debt (b)	40			110			95			521
Derivatives not designated as hedging instruments
Foreign currency exchange contracts (c)	(168		)	(10		)	(594		)	290
Cross-currency interest rate swap contracts	5			(75		)	79			(258		)
Interest rate contracts	20			9			57			(28		)
Commodity contracts	21			(24		)	53			(62		)
Total	$	43		$	(52	)	$	134		$	1

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(a)	For the third quarter and first nine months of 2017, a $116 million loss and a $90 million gain, respectively, were recorded in Other comprehensive income, net of tax. For the third quarter and first nine months of 2018, a $91 million loss and a $30 million gain, respectively, were recorded in Other comprehensive income, net of tax.


(b)	For 2017, the fair value changes on hedging instruments and on hedged debt were recorded in Other income/(loss), net; effective 2018, these amounts were recorded in Ford Credit interest, operating, and other expenses.

(c)

For the third quarter and first nine months of 2017, a $107 million loss and a $443 million loss were recorded in Cost of sales and a $61 million loss and a $151 million loss were recorded in Other income/(loss), net, respectively. For the third quarter and first nine months of 2018, a $16 million loss and a $186 million gain were recorded in Cost of sales and a $6 million gain and a $104 million gain were recorded in Other income(loss), net, 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						September 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	$	16,848	$	196	$	137
Fair value hedges
Interest rate contracts	28,008		248		135		27,769		112		632
Derivatives not designated as hedging instruments
Foreign currency exchange contracts	20,679		172		302		18,694		210		98
Cross-currency interest rate swap contracts	4,006		408		28		5,649		206		166
Interest rate contracts	60,504		276		137		68,226		250		298
Commodity contracts	660		37		4		738		5		45
Total derivative financial instruments, gross (a) (b)	$	133,452	$	1,548	$	912	$	137,924	$	979	$	1,376

Current portion			$	802	$	568			$	623	$	532
Non-current portion			746		344				356		844
Total derivative financial instruments, gross			$	1,548	$	912			$	979	$	1,376

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(a)	At December 31, 2017 and September 30, 2018, we held collateral of $15 million and $16 million, and we posted collateral of $38 million and $59 million, respectively.


(b)	At December 31, 2017 and September 30, 2018, the fair value of assets and liabilities available for counterparty netting was $618 million and $351 million, respectively. All derivatives are categorized within Level 2 of the fair value hierarchy.