Derivative Financial Instruments and Hedging Activities

6 Months Ended

Jun. 30, 2017

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
	2016			2017			2016			2017
Fair value hedges
Interest rate contracts
Net interest settlements and accruals excluded from the assessment of hedge effectiveness	$	98		$	62		$	197		$	132
Ineffectiveness (a)	5			4			22			—
Derivatives not designated as hedging instruments
Interest rate contracts	(43		)	30			(91		)	37
Foreign currency exchange contracts	59			(61		)	92			(90		)
Cross-currency interest rate swap contracts	140			16			335			74
Total	$	259		$	51		$	555		$	153

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(a) For the second quarter and first half of 2016, hedge ineffectiveness reflects the net change in fair value on derivatives of $273 million gain and $883 million gain, respectively, and change in value on hedged debt attributable to the change in benchmark interest rates of $268 million loss and $861 million loss, respectively. For the second quarter and first half of 2017, hedge ineffectiveness reflects the net change in fair value on derivatives of $34 million gain and $55 million loss, respectively, and change in value on hedged debt attributable to the change in benchmark interest rates of $30 million loss and $55 million gain, respectively.

NOTE 9. 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 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, 2016						June 30, 2017
	Notional		Fair Value of Assets		Fair Value of Liabilities		Notional		Fair Value of Assets		Fair Value of Liabilities
Fair value hedges
Interest rate contracts	$	33,175	$	487	$	80	$	34,958	$	429	$	83
Derivatives not designated as hedging instruments
Interest rate contracts	61,689		156		74		53,968		180		55
Foreign currency exchange contracts (a)	1,791		24		4		3,896		32		72
Cross-currency interest rate swap contracts	3,201		242		8		3,918		338		6
Total derivative financial instruments, gross (b) (c)	$	99,856	$	909	$	166	$	96,740	$	979	$	216

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

(b) At December 31, 2016 and June 30, 2017, we held collateral of $15 million and $10 million, respectively, and we posted collateral of $12 million and $16 million, respectively.

(c) At December 31, 2016 and June 30, 2017, the fair value of assets and liabilities available for counterparty netting was $113 million and $138 million, respectively. All derivatives are categorized within Level 2 of the fair value hierarchy.