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Table of Contents E. I. du Pont de Nemours and Company
Notes to the Consolidated Financial Statements (continued)
(Dollars in millions, except per share)
Interest Rate Risk
The company uses interest rate swaps to manage the interest rate mix of the total debt portfolio and related overall cost of borrowing.
Interest rate swaps involve the exchange of fixed for floating rate interest payments to effectively convert fixed rate debt into floating rate debt based on USD
LIBOR. Interest rate swaps allow the company to achieve a target range of floating rate debt.
Commodity Price Risk
Commodity price risk management programs serve to reduce exposure to price fluctuations on purchases of inventory such as natural gas, copper, corn,
soybeans and soybean meal. The company enters into over-the-counter and exchange-traded derivative commodity instruments to hedge the commodity price
risk associated with energy feedstock and agricultural commodity exposures.
Fair Value Hedges
Interest Rate Swaps
At December 31, 2011 , the company maintained a number of interest rate swaps, which were implemented at the time debt instruments were issued, to
manage the interest rate mix of the total debt portfolio and related overall cost of borrowing. These swaps involve the exchange of fixed for floating rate
interest payments to effectively convert fixed rate debt into floating rate debt based on USD LIBOR, allowing the company to achieve a target range of
floating rate debt. All interest rate swaps qualify for the shortcut method of hedge accounting, thus there is no ineffectiveness related to these hedges.
Cash Flow Hedges
Foreign Currency Contracts
The company's objective in managing exposure to foreign currency fluctuations is to reduce earnings and cash flow volatility associated with foreign currency
rate changes. Accordingly, the company uses foreign currency exchange instruments such as forwards and options to offset a portion of the company's
exposure to certain foreign currency-denominated revenues so that gains and losses on these contracts offset changes in the USD value of the related foreign
currency-denominated revenues.
Commodity Contracts
Commodity price risk management programs serve to reduce exposure to price fluctuations on purchases of inventory such as natural gas, copper, corn,
soybeans and soybean meal. The company enters into over-the-counter and exchange-traded derivative commodity instruments, including options, futures and
swaps, to hedge the commodity price risk associated with these exposures.
Treasury Rate Contracts
During 2010 and 2009, the company entered into treasury rate contracts to hedge the company's exposure to treasury rates on a portion of planned bond
issuances. The contracts were terminated at the time the bonds were issued prior to year end.
While each risk management program has a different time maturity period, most programs currently do not extend beyond the next two-year period. Cash
flow hedge results are reclassified into earnings during the same period in which the related exposure impacts earnings. Reclassifications are made sooner if it
appears that a forecasted transaction will not materialize. The following table summarizes the effect of cash flow hedges on accumulated other comprehensive
income (loss) for the years ended December 31, 2011 and 2010 :
2011 2010
Pre-tax Tax After-tax Pre-tax Tax After-tax
Beginning balance $ (47) $ 16 $ (31) $ (101) $ 36 $ (65)
Additions and revaluations of derivatives designated as
cash flow hedges 17 (5) 12 (36) 14 (22)
Clearance of hedge results to earnings 96 (36) 60 90 (34) 56
Ending balance $ 66 $ (25) $ 41 $ (47) $ 16 $ (31)
During the next 12 months, the pre-tax, tax and after-tax amounts expected to be reclassified from accumulated other comprehensive income (loss) into
earnings is $73, $(28) and $45, respectively.
F-37