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Derivatives and Hedging
 9 Months Ended
Sep. 30, 2014
Derivatives and Hedging  
Derivatives and Hedging

8. Derivatives and Hedging

 

We periodically use interest rate swaps to manage interest rate risk associated with our variable rate floor plan debt. We are party to interest rate swap agreements through December 2014 pursuant to which the LIBOR portion of $300.0 million of our floating rate floor plan debt is fixed at a rate of 2.135% and $100.0 million of our floating rate floor plan debt is fixed at a rate of 1.55%. We may terminate these agreements at any time, subject to the settlement of the then current fair value of the swap arrangements.

 

We used Level 2 inputs to estimate the fair value of the interest rate swap agreements. As of September 30, 2014 and December 31, 2013, the fair value of the swaps designated as hedging instruments was estimated to be a liability of $2.5 million and $7.7 million, respectively. During 2014 and 2013, there was no hedge ineffectiveness recorded in our income statement. During the three and nine months ended September 30, 2014, the swaps increased the weighted average interest rate on our floor plan borrowings by approximately 29 basis points.

 

Our commercial vehicle business sells vehicles and parts purchased from manufacturers in the U.S., Germany, and the U.K. In order to protect against exchange rate movements, we enter into foreign exchange forward contracts against anticipated cash flows. The contracts are timed to mature when major shipments are scheduled to arrive in Australia and when receipt of payment from customers is expected. We classify our foreign exchange forward contracts as cash flow hedges and state them at fair value. We used Level 2 inputs to estimate the fair value of the forward foreign exchange contracts. The fair value of the contracts designated as hedging instruments was estimated to be an asset of $1.5 million and $2.2 million as of September 30, 2014 and December 31, 2013, respectively.