Dow Chemical 2012 Annual Report Download - page 118

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The following table summarizes the fair value of financial instruments at December 31, 2012 and 2011:
Fair Value of Financial Instruments at December 31
2012 2011
In millions Cost Gain Loss
Fair
Value Cost Gain Loss
Fair
Value
Marketable securities: (1)
Debt securities:
Government debt (2) $ 506 $ 59 $ — $ 565 $ 556 $ 62 $ — $ 618
Corporate bonds 676 81 (1) 756 652 73 (2) 723
Total debt securities $ 1,182 $ 140 $ (1) $ 1,321 $ 1,208 $ 135 $ (2) $ 1,341
Equity securities 634 109 (3) 740 646 57 (36) 667
Total marketable securities $ 1,816 $ 249 $ (4) $ 2,061 $ 1,854 $ 192 $ (38) $ 2,008
Long-term debt including debt
due within one year (3) $ (20,591) $ 24 $ (3,195)$
(23,762)$ (21,059)$ 6 $(2,736)$ (23,789)
Derivatives relating to:
Interest rates $ —$ 1$ (6)$ (5)$ —$ —$ —$ —
Commodities (4) $ — $ 26 $ (7) $ 19 $ — $ 16 $ (1) $ 15
Foreign currency $ — $ 34 $ (20) $ 14 $ — $ 31 $ (17) $ 14
(1) Included in “Other investments” in the consolidated balance sheets.
(2) U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations.
(3) Cost includes fair value adjustments of $23 million at December 31, 2012 and $23 million at December 31, 2011.
(4) Presented net of cash collateral, as disclosed in Note 11.
Cost approximates fair value for all other financial instruments.
Risk Management
Dow’s business operations give rise to market risk exposure due to changes in interest rates, foreign currency exchange rates,
commodity prices and other market factors such as equity prices. To manage such risks effectively, the Company enters into
hedging transactions, pursuant to established guidelines and policies, which enable it to mitigate the adverse effects of financial
market risk. Derivatives used for this purpose are designated as cash flow, fair value or net foreign investment hedges where
appropriate. Accounting guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair
value. A secondary objective is to add value by creating additional nonspecific exposures within established limits and policies;
derivatives used for this purpose are not designated as hedges. The potential impact of creating such additional exposures is not
material to the Company’s results.
The Company’s risk management program for interest rate, foreign currency and commodity risks is based on
fundamental, mathematical and technical models that take into account the implicit cost of hedging. Risks created by derivative
instruments and the mark-to-market valuations of positions are strictly monitored at all times, using value at risk and stress
tests. Counterparty credit risk arising from these contracts is not significant because the Company minimizes counterparty
concentration, deals primarily with major financial institutions of solid credit quality, and the majority of its hedging
transactions mature in less than three months. In addition, the Company minimizes concentrations of credit risk through its
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, 2012. 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 2013.
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, 2012, 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