Ford 2007 Annual Report Download - page 104

Notes to the Financial Statements
102 Ford Motor Company | 2007 Annual Report
NOTE 23. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
Financial Services Sector
Ford Credit is exposed to interest rate changes and foreign currency exchange rate fluctuations in the normal course
of business. Interest rate and currency exposures are monitored and managed by us as an integral part of our overall risk
management program, which recognizes the unpredictability of financial markets and seeks to reduce potential adverse
effects on our operating results. Risk is reduced in two ways: (1) through the use of funding instruments that have
interest and maturity profiles similar to the assets they are funding, and (2) through the use of interest rate and foreign
exchange derivatives. Interest rate swaps are used to manage the effects of interest rate fluctuations. Foreign currency
exchange agreements, including forward contracts and swaps, are used to manage foreign exchange exposure. We
adhere to a risk management policy that is reviewed on a regular basis by our management. We do not engage in any
In 2007, we did not apply designated hedge accounting to any of our derivative instruments. In prior periods
presented, we elected to apply hedge accounting to certain derivatives. Derivatives that received designated hedge
accounting treatment were documented and the relationships were evaluated for effectiveness at the time they were
designated as well as throughout the hedge period.
Fair Value Hedges. Ford Credit uses certain derivatives to reduce the risk of changes in the fair value of liabilities. We
have designated receive-fixed, pay-float interest rate swaps as hedges of existing fixed-rate debt. The risk being hedged
was the risk of changes in the fair value of the hedged item attributable to changes in the benchmark interest rate. For
certain interest rate swaps we used the dollar-offset method to assess hedge effectiveness. Hedge ineffectiveness was
the difference between the change in fair value of the entire derivative instrument and the change in fair value of the
hedged item attributable to changes in the benchmark interest rate. Ineffectiveness was recorded directly in earnings.
The notional balances for these highly effective interest rate swaps were $0, $1.1 billion, and $1.8 billion at
December 31, 2007, 2006, and 2005, respectively. Other interest rate swaps met the specific criteria to assume no
ineffectiveness in the hedge relationship. These interest rate swaps had notional balances of $0, $0, and $3.8 billion at
December 31, 2007, 2006, and 2005, respectively.
Cash Flow Hedges. Ford Credit has designated receive-float, pay-fixed interest rate swaps as hedges of existing
floating rate debt. The risk being hedged was the risk of changes in the cash flows of the hedged item attributable to
changes in the benchmark interest rate. We used the change in variable cash flows method to measure hedge
ineffectiveness, which was the difference between the change in the fair value of the float leg of the swap and the change
in fair value of the hedged item. Hedge ineffectiveness was recorded directly in earnings. Ford Credit had no receive-
float, pay-fixed interest rates swaps classified as cash flow hedges at December 31, 2007, 2006, and 2005.
Net Investment Hedges. Ford Credit has used foreign currency forwards and options to hedge the net assets of certain
foreign entities to offset the translation and economic exposures related to its investment in these entities. We assessed
effectiveness based upon a comparison of the hedge with the beginning balance of the net investment level hedged, with
subsequent quarterly tests based upon changes in spot rates to determine the effective portion of the hedge. Ford Credit
had no foreign currency forwards or options classified as net investment hedges at December 31, 2007, 2006, and 2005.
Derivatives not designated as hedging instruments. In 2007, we did not apply hedge accounting to our derivatives.
Some derivatives did not qualify for hedge accounting; for others, we elected not to apply hedge accounting. We report
changes in the fair value of these derivatives through Financial Services revenues. The earnings impact primarily relates
to interest rate swaps, which are included in evaluating Ford Credit's overall risk management objective, and foreign
currency derivatives, which are offset by the revaluation of foreign denominated debt. The notional amount of derivatives
not designated for hedge accounting was $181.8 billion, $158.7 billion, and $143.7 billion at December 31, 2007, 2006,
and 2005, respectively.
We report the exchange of cash related to all of Ford Credit's derivative transactions, regardless of designation, in Net
cash (used in)/provided by investing activities in our statements of cash flows.
speculative activities in the derivative markets.