Derivative Financial Instruments and Hedging Activities

9 Months Ended

Sep. 30, 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 September 30 were as follows (in millions):

	Third Quarter						First Nine Months
	2016			2015			2016			2015
Fair value hedges
Interest rate contracts
Net interest settlements and accruals excluded from the assessment of hedge effectiveness	$	95		$	94		$	292		$	271
Ineffectiveness (a)	(1		)	10			21			6
Derivatives not designated as hedging instruments
Interest rate contracts	21			(22		)	(70		)	(83		)
Foreign currency exchange contracts	37			40			129			40
Cross-currency interest rate swap contracts	128			63			463			75
Total	$	280		$	185		$	835		$	309

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(a) For the third quarter and first nine months of 2016, hedge ineffectiveness reflects the net change in fair value on derivatives of $228 million loss and $655 million gain, respectively, and change in value on hedged debt attributable to the change in benchmark interest rates of $227 million gain and $634 million loss, respectively. For the third quarter and first nine months of 2015, hedge ineffectiveness reflects the net change in fair value on derivatives of $373 million gain and $345 million gain, respectively, and change in value on hedged debt attributable to the change in benchmark interest rates of $363 million loss and $339 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):

	September 30, 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	$	36,215	$	1,217	$	—	$	28,964	$	670	$	16
Derivatives not designated as hedging instruments
Interest rate contracts	61,650		142		122		62,638		159		112
Foreign currency exchange contracts (a)	1,474		115		1		1,713		22		4
Cross-currency interest rate swap contracts	3,765		383		—		3,137		73		111
Total derivative financial instruments, gross (b) (c)	$	103,104	1,857		123		$	96,452	924		243

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

(b) At September 30, 2016 and December 31, 2015, the net obligation to return cash collateral was $10 million and $0, respectively.

(c) At September 30, 2016 and December 31, 2015, the fair value of assets and liabilities available for counterparty netting was $87 million and $167 million, respectively. All derivatives are categorized within Level 2 of the fair value hierarchy.