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Derivative Financial Instruments and Hedging Activities
 9 Months Ended
Sep. 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 September 30 were as follows (in millions):
 
Third Quarter
 
First Nine Months
 
2016
 
2017
 
2016
 
2017
Fair value hedges
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
Net interest settlements and accruals excluded from the assessment of hedge effectiveness
$
95

 
$
50

 
$
292

 
$
182

Ineffectiveness (a)
(1
)
 
—

 
21

 
—

Derivatives not designated as hedging instruments


 


 
 
 
 
Interest rate contracts
21

 
20

 
(70
)
 
57

Foreign currency exchange contracts
37

 
(61
)
 
129

 
(151
)
Cross-currency interest rate swap contracts
128

 
5

 
463

 
79

Total
$
280

 
$
14

 
$
835

 
$
167

__________
(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 2017, hedge ineffectiveness reflects the net change in fair value on derivatives of $40 million loss and $95 million loss, respectively, and change in value on hedged debt attributable to the change in benchmark interest rates of $40 million gain and $95 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
 
September 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

 
$
31,802

 
$
323

 
$
132

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
61,689

 
156

 
74

 
57,144

 
227

 
119

Foreign currency exchange contracts (a)
1,791

 
24

 
4

 
3,732

 
62

 
147

Cross-currency interest rate swap contracts
3,201

 
242

 
8

 
3,998

 
370

 
22

Total derivative financial instruments, gross (b) (c)
$
99,856

 
$
909

 
$
166

 
$
96,676

 
$
982

 
$
420

__________
(a)
Includes forward contracts between Ford Credit and an affiliated company.
(b)
At December 31, 2016 and September 30, 2017, we held collateral of $15 million and $11 million, respectively, and we posted collateral of $12 million and $31 million, respectively.
(c)
At December 31, 2016 and September 30, 2017, the fair value of assets and liabilities available for counterparty netting was $113 million and $226 million, respectively. All derivatives are categorized within Level 2 of the fair value hierarchy.