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E. I. du Pont de Nemours and Company
Notes to the Consolidated Financial Statements (continued)
(Dollars in millions, except per share)
F-51
20. FINANCIAL INSTRUMENTS
Objectives and Strategies for Holding Derivative Instruments
In the ordinary course of business, the company enters into contractual arrangements (derivatives) to reduce its exposure to foreign
currency, interest rate and commodity price risks. The company has established a variety of derivative programs to be utilized
for financial risk management. These programs reflect varying levels of exposure coverage and time horizons based on an
assessment of risk.
Derivative programs have procedures and controls and are approved by the Corporate Financial Risk Management Committee,
consistent with the company's financial risk management policies and guidelines. Derivative instruments used are forwards,
options, futures and swaps. The company has not designated any nonderivatives as hedging instruments.
The company's financial risk management procedures also address counterparty credit approval, limits and routine exposure
monitoring and reporting. The counterparties to these contractual arrangements are major financial institutions and major
commodity exchanges. The company is exposed to credit loss in the event of nonperformance by these counterparties. The company
utilizes collateral support annex agreements with certain counterparties to limit its exposure to credit losses. The company's
derivative assets and liabilities are reported on a gross basis in the Consolidated Balance Sheets. The company anticipates
performance by counterparties to these contracts and therefore no material loss is expected. Market and counterparty credit risks
associated with these instruments are regularly reported to management.
The notional amounts of the company's derivative instruments were as follows:
December 31, 2015 2014
Derivatives designated as hedging instruments:
Interest rate swaps $ — $ 1,000
Foreign currency contracts 10 434
Commodity contracts 356 388
Derivatives not designated as hedging instruments:
Foreign currency contracts 8,065 10,586
Commodity contracts 70 166
Foreign Currency Risk
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 enters into various contracts that change in value as
foreign exchange rates change to protect the value of its existing foreign currency-denominated assets, liabilities, commitments
and cash flows.
The company routinely uses forward exchange contracts to offset its net exposures, by currency, related to the foreign currency-
denominated monetary assets and liabilities of its operations. The primary business objective of this hedging program is to maintain
an approximately balanced position in foreign currencies so that exchange gains and losses resulting from exchange rate changes,
net of related tax effects, are minimized. The company also uses foreign currency exchange contracts 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. The objective of the hedge program is to reduce earnings
and cash flow volatility related to changes in foreign currency exchange rates.
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
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 agricultural commodity exposures.