Dow Chemical 2013 Annual Report Download - page 114

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global orientation by transacting with large, internationally diversified financial counterparties. It is the Company’s policy to
not have credit-risk-related contingent features in its derivative instruments. No significant concentration of counterparty credit
risk existed at December 31, 2013. The Company does not anticipate losses from credit risk, and the net cash requirements
arising from counterparty risk associated with risk management activities are not expected to be material in 2014.
The Company revises its strategies as market conditions dictate and management reviews its overall financial strategies and the
impacts from using derivatives in its risk management program with the Company’s Board of Directors.
Interest Rate Risk Management
The Company enters into various interest rate contracts with the objective of lowering funding costs or altering interest rate
exposures related to fixed and variable rate obligations. In these contracts, the Company agrees with other parties to exchange,
at specified intervals, the difference between fixed and floating interest amounts calculated on an agreed-upon notional
principal amount. At December 31, 2013, the Company had open interest rate swaps with maturity dates that extend to 2021.
Foreign Currency Risk Management
The Company’s global operations require active participation in foreign exchange markets. The Company enters into foreign
exchange forward contracts and options, and cross-currency swaps to hedge various currency exposures or create desired
exposures. Exposures primarily relate to assets, liabilities and bonds denominated in foreign currencies, as well as economic
exposure, which is derived from the risk that currency fluctuations could affect the dollar value of future cash flows related to
operating activities. The primary business objective of the activity is to optimize the U.S. dollar value of the Company’s assets,
liabilities and future cash flows with respect to exchange rate fluctuations. Assets and liabilities denominated in the same
foreign currency are netted, and only the net exposure is hedged. At December 31, 2013, the Company had forward contracts,
options and cross-currency swaps to buy, sell or exchange foreign currencies. These contracts had various expiration dates,
primarily in the first quarter of 2014.
Commodity Risk Management
The Company has exposure to the prices of commodities in its procurement of certain raw materials. The primary purpose of
commodity hedging activities is to manage the price volatility associated with these forecasted inventory purchases. At
December 31, 2013, the Company had futures contracts, options and swaps to buy, sell or exchange commodities. These
agreements had various expiration dates through the fourth quarter of 2015.
Accounting for Derivative Instruments and Hedging Activities
Cash Flow Hedges
For derivatives that are designated and qualify as cash flow hedging instruments, the effective portion of the gain or loss on the
derivative is recorded in “Accumulated other comprehensive income (loss)” (“AOCI”); it is reclassified to “Cost of sales” in
the same period or periods that the hedged transaction affects income. The unrealized amounts in AOCI fluctuate based on
changes in the fair value of open contracts at the end of each reporting period. The Company anticipates volatility in AOCI and
net income from its cash flow hedges. The amount of volatility varies with the level of derivative activities and market
conditions during any period. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge
components excluded from the assessment of effectiveness are recognized in current period income.
The Company had open interest rate derivatives designated as cash flow hedges at December 31, 2013 with a net loss of $3
million after tax and a notional U.S. dollar equivalent of $417 million (net loss of $3 million after tax and a notional U.S. dollar
equivalent of $433 million at December 31, 2012).
Current open foreign currency forward contracts hedge the currency risk of forecasted feedstock purchase transactions until
July 2014. The effective portion of the mark-to-market effects of the foreign currency forward contracts is recorded in AOCI; it
is reclassified to income in the same period or periods that the underlying feedstock purchase affects income. The net loss from
the foreign currency hedges included in AOCI at December 31, 2013 was $11 million after tax (net loss of $14 million after tax
at December 31, 2012). During 2013, 2012 and 2011, there was no material impact on the consolidated financial statements due
to foreign currency hedge ineffectiveness. At December 31, 2013, the Company had open forward contracts with various
expiration dates to buy, sell or exchange foreign currencies with a notional U.S. dollar equivalent of $459 million ($366 million
at December 31, 2012).