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79
NOTES TO FINANCIAL STATEMENTS
NOTE 17. DERIVATIVE FINANCIAL INSTRUMENTS
We adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted,
on January 1, 2001, which establishes accounting and reporting standards for derivative instruments and requires that
all derivatives be recorded at fair value on the balance sheet, including embedded derivatives.
Our operations are exposed to global market risks, including the effect of changes in foreign currency exchange rates,
certain commodity prices and interest rates. As an integral part of our overall risk management program, we use derivatives
to manage financial exposures that occur in the normal course of business. Our objective is to minimize the financial
exposure arising from these risks.
Adjustments to income for the years ended December 31, were (in millions):
2002 2001
Financial Financial
Automotive Services Total Automotive Services Total
Income/(loss) before income taxes* $ (87) $ (225) $ (312) $ (588) $ (251) $ (839)
Net income/(loss) (57) (141) (198) (387) (157) (544)
* Automotive recorded in cost of sales; Financial Services recorded in revenues.
CASH FLOW HEDGES
We use cash flow hedges to minimize our exposure to foreign currency exchange, interest rate and commodity price risks
resulting in the normal course of business.
Derivatives used to minimize financial exposures for foreign exchange and commodity price risks generally mature within
three years or less, with a maximum maturity of seven years. The impact to earnings associated with discontinuance of cash
flow hedges and hedge ineffectiveness was a gain of $6 million in 2002 and a charge to earnings of $32 million in 2001.
Changes in the value of derivatives are included in other comprehensive income, a component of stockholders' equity, and
reclassified to earnings at the time the associated hedged transaction impacts net income. The following table summarizes
activity in other comprehensive income for designated cash flow hedges during the years ended December 31, (in millions):
2002 2001
Beginning of period:
Net unrealized gain/(loss) on derivative financial instruments $ (1,228) $ (550)
Increase/(decrease) in fair value of derivatives 847 (822)
(Gains)/losses reclassified from OCI 694 144
End of period:
Net unrealized gain/(loss) on derivative financial instruments $ 313 $ (1,228)
We expect to reclassify gains of $188 million from other comprehensive income to net income during the next twelve
months. Consistent with our comprehensive, non-speculative risk management practices, neither these nor future reclassifi-
cations are anticipated to have a material effect on net company earnings, as they should be substantially offset by the
effects on related underlying transactions.
Mercury Monterey