Derivative Financial Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2016

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 March 31 were as follows (in millions):

	First Quarter
	2016			2015
Fair value hedges
Interest rate contracts
Net interest settlements and accruals excluded from the assessment of hedge effectiveness	$	99		$	88
Ineffectiveness (a)	17			6
Derivatives not designated as hedging instruments
Interest rate contracts	(48		)	(43		)
Foreign currency exchange contracts	33			65
Cross-currency interest rate swap contracts	195			89
Total	$	296		$	205

__________

(a) For the first quarter of 2016 and 2015, hedge ineffectiveness reflects the net change in fair value on derivatives of $610 million gain and $221 million gain, respectively, and change in value on hedged debt attributable to the change in benchmark interest rates of $593 million loss and $215 million loss, respectively.

NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

Balance Sheet Effect of Derivative Financial Instruments

Derivative assets and liabilities are recorded on the 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 exposure in the event of default or breach of the counterparty agreement.

The fair value of our derivative instruments and the associated notional amounts, presented gross, were as follows (in millions):

	March 31, 2016								December 31, 2015
	Notional		Fair Value of Assets			Fair Value of Liabilities			Notional		Fair Value of Assets			Fair Value of Liabilities
Fair value hedges
Interest rate contracts	$	32,843	$	1,184		$	—		$	28,964	$	670		$	16
Derivatives not designated as hedging instruments
Interest rate contracts	65,538		182			159			62,638		159			112
Foreign currency exchange contracts (a)	2,138		49			8			1,713		22			4
Cross-currency interest rate swap contracts	3,701		195			37			3,137		73			111
Total derivative financial instruments, gross (b)	$	104,220	1,610			204			$	96,452	924			243
Counterparty netting and collateral (c)			(155		)	(155		)			(167		)	(167		)
Total derivative financial instruments, net			$	1,455		$	49				$	757		$	76

__________

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

(b) All derivatives are categorized within Level 2 of the fair value hierarchy.

(c) As of March 31, 2016 and December 31, 2015, we did not receive or pledge any cash collateral.