Regarding the driver, I had my Win 7 setup discover the correct FTDI driver, so I can’t comment on the FTDI drivers for download that you are referring to.
As for HyperTerminal, I never had a single positive experience with it, so I don’t use it. I have used TeraTerm in the past and currently use mostly Putty as it serves my needs well.
With regards to flow control, I left it as XON/XOFF in my settings, which is ok for my needs.
You never mentioned which board or setup you are using as target. You may want to check a different cable or the electrical signals on the target just to be sure that the host UART bits actually get to the target.