John Deere 2014 Annual Report Download - page 60

Derivatives Not Designated as Hedging Instruments
The company has certain interest rate contracts (swaps and
caps), foreign exchange contracts (forwards and swaps) and
cross-currency interest rate contracts (swaps), which were not
formally designated as hedges. These derivatives were held as
economic hedges for underlying interest rate or foreign currency
exposures primarily for certain borrowings and purchases or
sales of inventory. The total notional amounts of the interest
rate swaps at October 31, 2014 and 2013 were $6,317 million
and $5,627 million, the foreign exchange contracts were $3,524
million and $3,800 million and the cross-currency interest rate
contracts were $98 million and $85 million, respectively.
At October 31, 2014 and 2013, there were also $1,703 million
and $1,641 million, respectively, of interest rate caps purchased
and the same amounts sold at the same capped interest rate to
facilitate borrowings through securitization of retail notes.
The fair value gains or losses from the interest rate contracts
were recognized currently in interest expense and the gains or
losses from foreign exchange contracts in cost of sales or other
operating expenses, generally offsetting over time the expenses
on the exposures being hedged. The cash flows from these
non-designated contracts were recorded in operating activities
in the statement of consolidated cash flows.
Fair values of derivative instruments in the consolidated
balance sheet at October 31 in millions of dollars follow:
2014 2013
Other Assets
Designated as hedging instruments:
Interest rate contracts ............................................. $ 266 $ 295
Cross-currency interest rate contracts ..................... 13 14
Total designated ................................................. 279 309
Not designated as hedging instruments:
Interest rate contracts ............................................. 53 52
Foreign exchange contracts .................................... 18 32
Cross-currency interest rate contracts ..................... 3 1
Total not designated ........................................... 74 85
Total derivatives ...................................................... $ 353 $ 394
Accounts Payable and Accrued Expenses
Designated as hedging instruments:
Interest rate contracts ............................................. $ 35 $ 71
Cross-currency interest rate contracts ..................... 16
Total designated ................................................. 35 87
Not designated as hedging instruments:
Interest rate contracts ............................................. 46 49
Foreign exchange contracts .................................... 29 42
Cross-currency interest rate contracts ..................... 1
Total not designated ........................................... 75 92
Total derivatives ...................................................... $ 110 $ 179
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The classification and gains (losses) including accrued
interest expense related to derivative instruments on the
statement of consolidated income consisted of the following
in millions of dollars:
2014 2013 2012
Fair Value Hedges
Interest rate contracts – Interest expense ..... $ 155 $ (89) $ 335
Cash Flow Hedges
Recognized in OCI
(Effective Portion):
Interest rate contracts – OCI (pretax)* .......... (10) (15) (28)
Foreign exchange contracts –
OCI (pretax)* ........................................... (4) 58 (33)
Reclassified from OCI
(Effective Portion):
Interest rate contracts – Interest expense* .... (13) (22) (16)
Foreign exchange contracts –
Other expense* ....................................... (6) 49 (38)
Recognized Directly in Income
(Ineffective Portion) ...................................... ** ** **
Not Designated as Hedges
Interest rate contracts – Interest expense* .... $ 3 $ (6) $ (13)
Foreign exchange contracts –
Cost of sales ........................................... 25 35 (12)
Foreign exchange contracts –
Other expense* ....................................... 79 20 7
Total not designated ................................ $ 107 $ 49 $ (18)
* Includes interest and foreign exchange gains (losses) from cross-currency interest
rate contracts.
** The amounts are not significant.
Counterparty Risk and Collateral
Certain of the company’s derivative agreements contain credit
support provisions that may require the company to post
collateral based on the size of the net liability positions and
credit ratings. The aggregate fair value of all derivatives with
credit-risk-related contingent features that were in a net liability
position at October 31, 2014 and October 31, 2013, was $57
million and $91 million, respectively. The company, due to its
credit rating and amounts of net liability position, has not posted
any collateral. If the credit-risk-related contingent features were
triggered, the company would be required to post collateral up
to an amount equal to this liability position, prior to considering
applicable netting provisions.
Derivative instruments are subject to significant concen-
trations of credit risk to the banking sector. The company
manages individual counterparty exposure by setting limits that
consider the credit rating of the counterparty, the credit default
swap spread of the counterparty and other financial commitments
and exposures between the company and the counterparty banks.
All interest rate derivatives are transacted under International
Swaps and Derivatives Association (ISDA) documentation.
Some of these agreements include credit support provisions.
Each master agreement permits the net settlement of amounts
owed in the event of default or termination.