v2.4.0.6
Derivative Financial Instruments and Risk Management
 6 Months Ended
Jun. 30, 2012
Derivative Financial Instruments and Risk Management [Abstract]  
Derivative Financial Instruments and Risk Management [Text Block]
Derivative Financial Instruments and Risk Management

Automotive

Derivatives and Hedge Accounting

In accordance with our risk management policy, we enter into a variety of foreign currency exchange rate and commodity derivative contracts to manage our exposure to fluctuations in certain foreign currency exchange rates and commodity prices. At June 30, 2012 our derivative instruments consisted primarily of forward contracts and options. At June 30, 2012 and December 31, 2011 no outstanding derivative contracts were designated in hedging relationships. We manage our counterparty credit risk by monitoring the credit ratings of our counterparties and by requiring them to post collateral in certain circumstances. Certain of our agreements with counterparties require that we provide cash collateral. At June 30, 2012 and December 31, 2011 no collateral was posted related to derivative instruments, and we did not have any agreements with counterparties to derivative instruments containing covenants requiring the maintenance of certain credit rating levels or credit risk ratios that would require the posting of collateral in the event that such covenants are violated.

Fair Value of Derivatives

The following tables summarize fair value measurements of our derivative instruments measured on a recurring basis (dollars in millions):
 
June 30, 2012
 
 
 
Derivative Assets
 
Derivative Liabilities
 
Notional
 
Current(a)
 
Non-Current(b)
 
Current(c)
 
Non-Current(d)
Foreign currency
$
6,860

 
$
88

 
$
—

 
$
38

 
$
—

Commodity
2,512

 
8

 
4

 
5

 
2

Embedded
1,336

 
16

 
35

 
2

 
4

Total
$
10,708

 
$
112

 
$
39

 
$
45

 
$
6

 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
 
 
Derivative Assets
 
Derivative Liabilities
 
Notional
 
Current(a)
 
Non-Current(b)
 
Current(c)
 
Non-Current(d)
Foreign currency
$
6,507

 
$
64

 
$
—

 
$
46

 
$
—

Commodity
2,566

 
9

 
—

 
10

 
5

Embedded
1,461

 
28

 
124

 
1

 
5

Total
$
10,534

 
$
101

 
$
124

 
$
57

 
$
10

__________
(a)
Recorded in Other current assets and deferred income taxes.
(b)
Recorded in Other assets and deferred income taxes.
(c)
Recorded in Accrued liabilities.
(d)
Recorded in Other liabilities and deferred income taxes.
 
June 30, 2012
 
December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency
$
—

 
$
88

 
$
—

 
$
88

 
$
—

 
$
64

 
$
—

 
$
64

Commodity
—

 
4

 
8

 
12

 
—

 
9

 
—

 
9

Embedded
—

 
3

 
48

 
51

 
—

 
4

 
148

 
152

Total
$
—

 
$
95

 
$
56

 
$
151

 
$
—

 
$
77

 
$
148

 
$
225

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency
$
—

 
$
38

 
$
—

 
$
38

 
$
—

 
$
46

 
$
—

 
$
46

Commodity
—

 
7

 
—

 
7

 
—

 
5

 
10

 
15

Embedded
—

 
6

 
—

 
6

 
—

 
6

 
—

 
6

Total
$
—

 
$
51

 
$
—

 
$
51

 
$
—

 
$
57

 
$
10

 
$
67



We measure the fair value of our portfolio of foreign currency, commodity and embedded derivatives using industry accepted models. The significant Level 2 inputs used in the valuation of our derivatives include spot rates, forward rates, volatility and interest rates. These inputs are obtained from pricing services, broker quotes and other sources.

We entered into a power plant lease agreement which included the purchase of natural gas at a fixed price adjusted for movements in heavy fuel oil and coal indices as published by a German governmental agency. The natural gas agreement was determined to be a derivative for accounting purposes and is valued as a forward contract. This commodity derivative valuation uses Level 3 inputs. The significant unobservable inputs used in the fair value measurement of our commodity derivative are coal and heavy fuel oil forward rates and supplier credit spreads. Significant increases (decreases) in the coal and heavy fuel oil index and supplier credit spread would result in significant decreases (increases) to the fair value measurement.

We are party to a long-term supply agreement which provides for pricing to be partially denominated in a currency other than the functional currency of the parties to the contract. This pricing feature was determined to be an embedded derivative which we have bifurcated for valuation and accounting purposes. This embedded derivative is valued using an industry accepted model which contains Level 3 inputs.

The significant unobservable inputs used in the fair value measurement of our embedded foreign currency derivative is the estimate of the Turkish central bank's Euro/Turkish Lira (TRY) forward exchange rate and monthly volume commitment and vehicle mix. Significant decreases (increases) to Euro/TRY forward exchange rate and monthly volume commitment and vehicle mix would result in significant decreases (increases) to the fair value measurement.

The valuations are performed, reviewed and approved by personnel with appropriate expertise in valuation methodologies. For certain derivatives we compare our own valuations with valuations prepared by independent outside parties.

The following table summarizes the significant quantitative unobservable inputs and assumptions used in the fair value measurement of the derivatives at June 30, 2012:

 
Valuation Technique
 
Significant Unobservable Input
 
Metric
Commodity
Discounted cash flow
 
Coal forward price per ton in Euro(a)
 
€110.44
 
 
 
Heavy fuel oil forward price per ton in Euro(a)
 
€528.56
 
 
 
Supplier nonperformance risk (average)
 
2.72%
Embedded
Discounted cash flow
 
Average Euro/TRY forward exchange rate(b)
 
€2.75
 
 
 
Volume commitment and vehicle mix in Euro(c)
 
€1.0 billion
__________
(a)
Forward prices are estimated to be equivalents of the spot price as published by a governmental agency.
(b)
Calculated by adjusting market forward rates for the spread between current market and Turkish central bank spot prices.
(c)
Volume commitment is spread evenly on a monthly basis and vehicle mix is pursuant to management forecasts.

The following table summarizes the activity for our derivative investments measured using Level 3 inputs (dollars in millions):
 
Three Months Ended June 30, 2012
 
Three Months Ended June 30, 2011
 
Embedded
 
Commodity
 
Total
 
Embedded
 
Commodity
 
Total
Balance at beginning of period
$
104

 
$
16

 
$
120

 
$
57

 
$
—

 
$
57

Total realized/unrealized gains (losses)(a)
 
 
 
 
 
 
 
 
 
 
 
Included in earnings
(43
)
 
(6
)
 
(49
)
 
87

 
—

 
87

Included in other comprehensive income
(6
)
 
(1
)
 
(7
)
 
1

 
—

 
1

Settlements
(7
)
 
(1
)
 
(8
)
 
—

 
—

 
—

Balance at end of period
$
48

 
$
8

 
$
56

 
$
145

 
$
—

 
$
145

 
 
 
 
 
 
 
 
 
 
 
 
Amount of total gains (losses) in the period included in earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date
$
(44
)
 
$
(6
)
 
$
(50
)
 
$
87

 
$
—

 
$
87

 
Six Months Ended June 30, 2012
 
Six Months Ended June 30, 2011
 
Embedded
 
Commodity
 
Total
 
Embedded
 
Commodity
 
Total
Balance at beginning of period
$
148

 
$
(10
)
 
$
138

 
$
—

 
$
—

 
$
—

Total realized/unrealized gains (losses)(a)

 

 

 

 

 

Included in earnings
(86
)
 
(2
)
 
(88
)
 
140

 
—

 
140

Included in other comprehensive income
(2
)
 
(1
)
 
(3
)
 
5

 
—

 
5

Settlements
(12
)
 
(3
)
 
(15
)
 
—

 
—

 
—

Issuances
—

 
24

 
24

 
—

 
—

 
—

Balance at end of period
$
48

 
$
8

 
$
56

 
$
145

 
$
—

 
$
145

 
 
 
 
 
 
 
 
 
 
 
 
Amount of total gains (losses) in the period included in earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date
$
(86
)
 
$
(2
)
 
$
(88
)
 
$
140

 
$
—

 
$
140

________
(a)
Realized and unrealized gains (losses) are recorded in Interest income and other non-operating income, net and foreign currency translation gains (losses) are recorded in Accumulated other comprehensive income.

Gains (Losses) on Derivatives

The following table summarizes derivative gains (losses) recorded in Interest income and other non-operating income, net (dollars in millions):
 
Three Months Ended
 
Six Months Ended
 
June 30, 2012
 
June 30, 2011
 
June 30, 2012
 
June 30, 2011
Foreign currency
$
24

 
$
35

 
$
8

 
$
25

Commodity
(20
)
 
(44
)
 
(26
)
 
(44
)
Embedded
(45
)
 
86

 
(88
)
 
145

Warrants
—

 
—

 
—

 
4

Total gains (losses) recorded in earnings
$
(41
)
 
$
77

 
$
(106
)
 
$
130



Other Derivatives

In February 2011 we exercised warrants to purchase 4 million shares of a supplier's common stock at $2.76 per share and sold the shares and received proceeds of $48 million.

Automotive Financing - GM Financial

GM Financial is exposed to market risks arising from adverse changes in interest rates due to floating interest rate exposure on its credit facilities and on certain securitization notes payable and manages this exposure with interest rate swaps and caps. GM Financial had interest rate swaps and caps in asset positions with notional amounts of $1.5 billion and $2.0 billion at June 30, 2012 and December 31, 2011. GM Financial had interest rate swaps and caps in liability positions with notional amounts of $1.5 billion and $2.0 billion at June 30, 2012 and December 31, 2011. The fair value of these derivative financial instruments was insignificant.