Derivative Financial Instruments and Hedging Activities

6 Months Ended

Jun. 30, 2015

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 interest rates and foreign currency exchange 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
	2015			2014			2015			2014
Fair value hedges
Interest rate contracts
Net interest settlements and accruals excluded from the assessment of hedge effectiveness	$	89		$	72		$	177		$	141
Ineffectiveness (a)	(10		)	5			(4		)	10
Derivatives not designated as hedging instruments
Interest rate contracts	(18		)	(9		)	(61		)	(27		)
Foreign currency exchange contracts	(65		)	(25		)	—			(30		)
Cross-currency interest rate swap contracts	(77		)	(11		)	12			(16		)
Total	$	(81	)	$	32		$	124		$	78

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(a) For the second quarter and first half of 2015, hedge ineffectiveness reflects the net change in fair value on derivatives of $249 million loss and $28 million loss, respectively, and change in value on hedged debt attributable to the change in benchmark interest rates of $239 million gain and $24 million gain, respectively. For the second quarter and first half of 2014, hedge ineffectiveness reflects the net change in fair value on derivatives of $162 million gain and $267 million gain, respectively, and change in value on hedged debt attributable to the change in benchmark interest rates of $157 million loss and $257 million loss, respectively.

NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

Balance Sheet Effect of Derivative Financial Instruments

Derivative financial instruments are recorded on the balance sheet at fair value, presented on a gross basis, and include an adjustment for non-performance risk. Notional amounts are presented on a gross basis. The notional amounts of the derivative financial instruments do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of our financial risk exposure. We enter into master agreements with counterparties that may allow for netting of exposure in the event of default or termination of the counterparty agreement due to breach of contract.

The notional amount and estimated fair value of our derivative financial instruments were as follows (in millions):

	June 30, 2015								December 31, 2014
	Notional		Fair Value of Assets			Fair Value of Liabilities			Notional		Fair Value of Assets			Fair Value of Liabilities
Fair value hedges
Interest rate contracts	$	24,202	$	572		$	38		$	23,203	$	602		$	38
Derivatives not designated as hedging instruments
Interest rate contracts	57,897		157			132			56,558		168			89
Foreign currency exchange contracts (a)	1,265		—			41			1,527		18			1
Cross-currency interest rate swap contracts	2,403		94			167			2,425		71			39
Total derivative financial instruments, gross	$	85,767	823			378			$	83,713	859			167
Counterparty netting and collateral (b)			(161		)	(161		)			(136		)	(136		)
Total derivative financial instruments, net			$	662		$	217				$	723		$	31

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(a) Includes forward contracts between Ford Credit and an affiliated company.

(b) At June 30, 2015 and December 31, 2014, we did not receive or pledge any cash collateral.