Dow Chemical 2012 Annual Report Download - page 119

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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, 2012, 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 2013.
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, 2012, 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.
At December 31, 2012, the Company had no net loss from previously terminated interest rate cash flow hedges included in
AOCI ($1 million after tax at December 31, 2011). During 2012, 2011 and 2010, there was no material impact on the
consolidated financial statements due to interest rate hedge ineffectiveness. The Company had open interest rate derivatives
designated as cash flow hedges at December 31, 2012 with a net loss of $3 million after tax and a notional U.S. dollar
equivalent of $433 million (no open interest rate derivatives designated as cash flow hedges at December 31, 2011).
Current open foreign currency forward contracts hedge the currency risk of forecasted feedstock purchase transactions
until April 2013. 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, 2012 was $14 million after tax (net gain of $2 million
after tax at December 31, 2011). During 2012, 2011 and 2010, there was no material impact on the consolidated financial
statements due to foreign currency hedge ineffectiveness. At December 31, 2012, 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 $366 million
($432 million at December 31, 2011).
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 October 2014.
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, 2012 was $24 million after tax ($7 million after tax loss at December 31, 2011).
During 2012, 2011 and 2010, there was no material impact on the consolidated financial statements due to commodity hedge
ineffectiveness. At December 31, 2012 and 2011, the Company had the following gross notionals of outstanding commodity
forward contracts to hedge forecasted purchases:
Commodity
Dec 31,
2012
Dec 31,
2011 Notional Volume Unit
Corn 1.9 0.6 million bushels
Crude Oil 0.4 0.2 million barrels
Ethane 1.8 1.6 million barrels
Naphtha 90.0 90.0 kilotons
Natural Gas 186.0 7.4 million million British thermal units
Ethane / Propane Mix — 0.2 million barrels
Soybeans 1.3 0.3 million bushels