The Company is exposed to certain risks such as foreign currency exchange rate risk, interest rate risk and commodity price risk. To reduce its exposure to such risks, the Company selectively uses derivative financial instruments. All derivative transactions are authorized and executed pursuant to regularly reviewed policies and procedures, which prohibit the use of financial instruments for speculative trading purposes.

All derivative instruments are recognized on the balance sheet at fair value (see Note 8). In accordance with ASC Topic 815, "Derivatives and Hedging," the accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. Changes in the fair value of derivatives that are designated as fair value hedges, along with the gain or loss on the hedged item, are recorded in current period earnings. For derivative instruments that are designated as cash flow hedges, the effective portion of gains and losses that result from changes in the fair value of derivative instruments is initially recorded in other comprehensive income (OCI) and subsequently reclassified into earnings when the hedged item affects income. The Company assesses, both at the inception of each hedge and on an on-going basis, whether the derivatives that are used in its hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. Any ineffective portion is immediately recognized in earnings. No component of a hedging derivative instrument's gain or loss is excluded from the assessment of hedge effectiveness. Derivative instruments that do not qualify for hedge accounting are recorded at fair value and any changes in fair value are recorded in current period earnings.

The Company sells its products internationally and in most markets those sales are made in the foreign country's local currency. As a result, the Company's earnings can be affected by fluctuations in the value of the U.S. dollar relative to foreign currency. The Company's most significant foreign currency risk relates to the Euro, the Australian dollar and the Japanese yen. The Company utilizes foreign currency contracts to mitigate the effects of these currencies' fluctuations on earnings. The foreign currency contracts are entered into with banks and allow the Company to exchange a specified amount of foreign currency for U.S. dollars at a future date, based on a fixed exchange rate.

The Company utilizes natural gas contracts to hedge portions of the cost of natural gas consumed in the Company's motorcycle production operations.

The Company's foreign currency contracts and natural gas contracts generally have maturities of less than one year.

The Company's earnings are affected by changes in interest rates. HDFS utilizes interest rate swaps to reduce the impact of fluctuations in interest rates on its unsecured commercial paper by converting a portion from a floating rate basis to a fixed rate basis. In addition, HDFS utilized interest rate swaps with its medium-term notes which matured in December 2010; however, the impact was to convert from a fixed rate basis to a floating rate basis. HDFS also entered into derivative contracts to facilitate its first quarter 2008 term asset-backed securitization transaction as well as its third quarter 2007 term asset-backed securitization transaction. These derivatives, which hedge assets held by VIEs, do not qualify for hedge accounting treatment. The derivative contracts related to these term asset-backed securitizations expired during 2011 and 2010, respectively. Additionally, to facilitate the asset-backed commercial paper conduit facility agreements that the Company entered into in April 2009, HDFS entered into derivative contracts, which did not qualify for hedge accounting treatment. These derivative contracts were terminated in 2010. The fair value of HDFS's interest rate swaps is determined using pricing models that incorporate quoted prices for similar assets and observable inputs such as interest rates and yield curves.


	June 26, 2011						June 27, 2010
Derivatives Designated As Hedging Instruments Under ASC Topic 815	Notional Value		Asset Fair Value(a)		Liability Fair Value(b)		Notional Value		Asset Fair Value(a)		Liability Fair Value(b)
Foreign currency contracts^(c)	$	272,637	$	—	$	9,691	$	74,033	$	6,912	$	—
Natural gas contracts^(c)		2,915		—		86		2,209		—		138
Interest rate swaps - unsecured commercial paper^(c)		117,500		—		5,156		155,000		—		9,656
Interest rate swaps - medium-term notes^(d)		—		—		—		150,000		2,918		—

Total	$	393,052	$	—	$	14,933	$	381,242	$	9,830	$	9,794


	June 26, 2011						June 27, 2010
Derivatives Not Designated As Hedging Instruments Under ASC Topic 815	Notional Value		Asset Fair Value^(a)		Liability Fair Value^(b)		Notional Value		Asset Fair Value^(a)		Liability Fair Value^(b)
Derivatives - securitization transactions	$	—	$	—	$	—	$	135,836	$	—	$	66
Derivatives - conduit facility		—		—		—		513,955		1,629		—

	$	—	$	—	$	—	$	649,791	$	1,629	$	66

(a)	Included in other current assets

(b)	Included in accrued liabilities

(c)	Derivative designated as a cash flow hedge

(d)	Derivative designated as a fair value hedge

The following tables summarize the amount of gains and losses related to derivative financial instruments designated as cash flow hedges (in thousands):


	Amount of Gain/(Loss) Recognized in OCI
	Three months ended						Six months ended
Cash Flow Hedges	June 26, 2011			June 27, 2010			June 26, 2011			June 27, 2010
Foreign currency contracts	$	(6,760	)	$	4,470		$	(16,921	)	$	13,871
Natural gas contracts		(227	)		255			(264	)		(649	)
Interest rate swaps - unsecured commercial paper		(397	)		(1,681	)		(405	)		(3,481	)

Total	$	(7,384	)	$	3,044		$	(17,590	)	$	9,741


	Amount of Gain/(Loss) Reclassified from AOCI into Income
	Three months ended						Six months ended						Expected to be Reclassified Over the Next Twelve Months
Cash Flow Hedges	June 26, 2011			June 27, 2010			June 26, 2011			June 27, 2010			Expected to be Reclassified Over the Next Twelve Months
Foreign currency contracts^(a)	$	(14,781	)	$	3,320		$	(20,788	)	$	3,681		$	7,404
Natural gas contracts^(a)		(166	)		(352	)		(424	)		(460	)		86
Interest rate swaps - unsecured commercial paper^(b)		(1,336	)		(1,558	)		(2,686	)		(3,344	)		4,343

Total	$	(16,283	)	$	1,410		$	(23,898	)	$	(123	)	$	11,833

(a)	Gain/(loss) reclassified from accumulated other comprehensive income (AOCI) to income is included in cost of goods sold.

(b)


	Amount of Gain/(Loss) Reclassified from AOCI into Income
	Three months ended						Six months ended						Expected to be Reclassified Over the Next Twelve Months
Cash Flow Hedges	June 26, 2011			June 27, 2010			June 26, 2011			June 27, 2010			Expected to be Reclassified Over the Next Twelve Months
Foreign currency contracts^(a)	$	(14,781	)	$	3,320		$	(20,788	)	$	3,681		$	7,404
Natural gas contracts^(a)		(166	)		(352	)		(424	)		(460	)		86
Interest rate swaps - unsecured commercial paper^(b)		(1,336	)		(1,558	)		(2,686	)		(3,344	)		4,343

Total	$	(16,283	)	$	1,410		$	(23,898	)	$	(123	)	$	11,833

(a)	Gain/(loss) reclassified from accumulated other comprehensive income (AOCI) to income is included in cost of goods sold.

(b)	Gain/(loss) reclassified from AOCI to income is included in financial services interest expense.

For the three and six months ended June 26, 2011 and June 27, 2010, the cash flow hedges were highly effective and, as a result, the amount of hedge ineffectiveness was not material. No amounts were excluded from effectiveness testing.

The following tables summarize the amount of gains and losses related to derivative financial instruments designated as fair value hedges (in thousands):


	Amount of Loss Recognized in Income on Derivative
	Three months ended					Six months ended
Fair Value Hedges	June 26, 2011		June 27, 2010			June 26, 2011		June 27, 2010
Interest rate swaps - medium-term notes^(a)	$	—	$	(1,798	)	$	—	$	(3,154	)

	Amount of Gain Recognized in Income on Hedged Debt
	Three months ended					Six months ended
Fair Value Hedges	June 26, 2011		June 27, 2010			June 26, 2011		June 27, 2010
Interest rate swaps - medium-term notes^(a)	$	—	$	1,798		$	—	$	3,154

(a)	Gain/(loss) recognized in income is included in financial services interest expense.

The following table summarizes the amount of gains and losses related to derivative financial instruments not designated as hedging instruments (in thousands):


	Amount of Gain/(Loss) Recognized in Income on Derivative
	Three months ended					Six months ended
Derivatives not Designated as Hedges	June 26, 2011		June 27, 2010			June 26, 2011		June 27, 2010
Derivatives - securitization transactions^(a)	$	—	$	2		$	—	$	(7	)
Derivatives - conduit facility^(a)		—		(2,210	)		—		(5,574	)

	$	—	$	(2,208	)	$	—	$	(5,581	)

(a)	Gain/(loss) recognized in income is included in financial services revenue.

The Company is exposed to credit loss risk in the event of non-performance by counterparties to these derivative financial instruments. Although no assurances can be given, the Company does not expect any of the counterparties to these derivative financial instruments to fail to meet its obligations. To manage credit loss risk, the Company selects counterparties based on credit ratings and, on a quarterly basis, evaluates each hedge's net position relative to the counterparty's ability to cover its position.