Dow Chemical 2013 Annual Report Download - page 115

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Commodity swaps, futures and option contracts with maturities of not more than 36 months are utilized and designated as cash
flow hedges of forecasted commodity purchases. Current open contracts hedge forecasted transactions until March 2015. The
effective portion of the mark-to-market effect of the cash flow hedge instrument is recorded in AOCI; it is reclassified to
income in the same period or periods that the underlying commodity purchase affects income. The net gain from commodity
hedges included in AOCI at December 31, 2013 was $14 million after tax ($24 million after tax gain at December 31, 2012).
During 2013, 2012 and 2011, there was no material impact on the consolidated financial statements due to commodity hedge
ineffectiveness. At December 31, 2013 and 2012, the Company had the following gross aggregate notionals of outstanding
commodity forward and futures contracts to hedge forecasted purchases:
Commodity
Dec 31,
2013
Dec 31,
2012 Notional Volume Unit
Corn 2.7 1.9 million bushels
Crude Oil 0.5 0.4 million barrels
Ethane 1.0 1.8 million barrels
Naphtha 3.0 90.0 kilotons
Natural Gas 82.9 186.0 million million British thermal units
Soybeans 0.8 1.3 million bushels
The net after-tax amounts to be reclassified from AOCI to income within the next 12 months are a $13 million gain for
commodity contracts, an $11 million loss for foreign currency contracts and a $4 million loss for interest rate contracts.
Fair Value Hedges
For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the
offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current period income and reflected
as “Interest expense and amortization of debt discount” in the consolidated statements of income. The short-cut method is used
when the criteria are met. At December 31, 2013 and 2012, the Company had no open interest rate swaps designated as fair
value hedges of underlying fixed rate debt obligations.
Net Foreign Investment Hedges
For derivative instruments that are designated and qualify as net foreign investment hedges, the effective portion of the gain or
loss on the derivative is included in “Cumulative Translation Adjustments” in AOCI. At December 31, 2013 and 2012, the
Company had no open forward contracts or outstanding options to buy, sell or exchange foreign currencies designated as net
foreign investment hedges. At December 31, 2013, the Company had outstanding foreign-currency denominated debt
designated as a hedge of net foreign investment of $190 million ($233 million at December 31, 2012). The results of hedges of
the Company’s net investment in foreign operations included in “Cumulative Translation Adjustments” in AOCI was a net gain
of $27 million after tax for the period ended December 31, 2013 (net gain of $22 million after tax for the period ended
December 31, 2012). During 2013, 2012 and 2011 there was no material impact on the consolidated financial statements due to
hedge ineffectiveness. See Note 23 for further detail on changes in AOCI.
Other Derivative Instruments
The Company utilizes futures, options and swap instruments that are effective as economic hedges of commodity price
exposures, but do not the meet hedge accounting criteria for derivatives and hedging. At December 31, 2013 and 2012, the
Company had the following gross aggregate notionals of outstanding commodity contracts:
Commodity
Dec 31,
2013
Dec 31,
2012 Notional Volume Unit
Ethane 0.3 1.0 million barrels
Natural Gas 5.2 33.0 million million British thermal units
The Company also uses foreign exchange forward contracts, options and cross-currency swaps that are not designated as
hedging instruments primarily to manage foreign currency exposure. The Company had open foreign exchange contracts and
cross-currency swaps with various expiration dates to buy, sell or exchange foreign currencies with a gross notional U.S. dollar
equivalent of $17,228 million at December 31, 2013 ($17,637 million at December 31, 2012) and had no open interest rate
swaps at December 31, 2013 ($472 million notional U.S. dollar equivalent of open interest rate swaps at December 31, 2012).