Dow Chemical 2014 Annual Report Download - page 114

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not readily determinable. These investments are reviewed quarterly for impairment indicators. The Company's impairment
analysis resulted in an $18 million reduction in the cost basis of these investments for the year ended December 31, 2014; the
analysis in 2013 resulted in a $6 million reduction for the year ended December 31, 2013.
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, 2014. 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 2015.
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, 2014, 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, 2014, 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 2015.
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, 2014, 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 2020.
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 loss” (“AOCL”); it is reclassified to “Cost of sales” in the same
period or periods that the hedged transaction affects income. The unrealized amounts in AOCL fluctuate based on changes in
the fair value of open contracts at the end of each reporting period. The Company anticipates volatility in AOCL and net
income from its cash flow hedges. The amount of volatility varies with the level of derivative activities and market conditions