Ford reports $204 million derivatives charge

Ford Motor Co. reported a $204 million charge to income related to derivatives in the first quarter.

Interest rate contracts hedging debt fell in value $339 million, roughly balancing the $329 million fair value increase in the underlying bonds over the three months to March 31.

The automaker also incurred fair value losses on non-hedging derivatives: $46 million related to commodity instruments, $17 million to interest rate instruments, and $116 million to foreign exchange contracts.

In the first quarter of last year, Ford reported an income gain attributable to derivatives of $83 million and for full-year 2017 overall a gain of $245 million.

Why it matters

Ford uses a mix of derivatives designated as hedging and non-hedging instruments to handle global market risks. Fair value hedges, like those interest rate swaps used to cover its debt issuances, generally move inversely to the value of the underlying instruments in the same reporting period, cancelling out any positive or negative changes. Those not designated as hedging derivatives, though, are effectively ‘naked’ positions in accounting terms, meaning Ford has to include their gains and losses out-of-sync with those relating to the underlying risks – whether they be foreign exchange, commodity, or cross-currency exposures. This effect can artificially inflate or degrade income on a quarterly view. When losses are especially pronounced, it can therefore require executives to explain what’s happened to analysts and investors – something Ford didn’t feel the need to do this time around.

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