Hedging Activities

9 Months Ended

Sep. 30, 2011

Hedging Activities

Hedging Activities

14.      Hedging Activities

Corning operates in many foreign countries and as a result is exposed to movements in foreign currency exchange rates.  The areas in which exchange rate fluctuations affect us include:

·   Financial instruments and transactions denominated in foreign currencies, which impact earnings; and

·   The translation of net assets in foreign subsidiaries for which the functional currency is not the U.S. dollar, which impacts our net equity.

Our most significant foreign currency exposures relate to the Japanese yen, Korean won, New Taiwan dollar and the Euro.  We manage our foreign currency exposure primarily by entering into foreign exchange forward contracts with durations of generally 18 months or less to hedge foreign currency risk.  The hedges are scheduled to mature coincident with the timing of the underlying foreign currency commitments and transactions.  The objective of these contracts is to neutralize the impact of exchange rate movements on our operating results.

The forward and option contracts we use in managing our foreign currency exposures contain an element of risk in that the counterparties may be unable to meet the terms of the agreements.  However, we minimize this risk by limiting the counterparties to a diverse group of highly-rated major domestic and international financial institutions with which we  have other financial relationships.  We are exposed to potential losses in the event of non-performance by these counterparties.  However, we do not expect to record any losses as a result of counterparty default.  Neither we nor our counterparties are required to post collateral for these financial instruments.

The amount of hedge ineffectiveness at September 30, 2011 and at December 31, 2010 was insignificant.

Cash Flow Hedges

Our cash flow hedging activities utilize foreign exchange forward contracts to reduce the risk that movements in exchange rates will adversely affect the eventual net cash flows resulting from the sale of products to foreign customers and purchases from foreign suppliers.  Corning uses a regression analysis to monitor the effectiveness of its cash flow hedges both prospectively and retrospectively.  Corning defers net gains and losses from cash flow hedges into accumulated other comprehensive income on the consolidated balance sheet until such time as the hedged item impacts earnings.  At September 30, 2011, the amount of net losses expected to be reclassified into earnings within the next 12 months is $24 million.

Undesignated Hedges

Corning uses other foreign exchange forward contracts that are not designated as hedging instruments for accounting purposes.  The undesignated hedges limit exposures to foreign currency fluctuations related to certain monetary assets, monetary liabilities and net earnings in foreign currencies.

Net Investment in Foreign Operations

In February 2000, we issued $500 million of Euro-denominated notes that were designated as a hedge of a net investment in foreign operations.  The effective portion of the changes in fair value of the outstanding debt balance has been included as a component of the foreign currency translation adjustment (CTA) within accumulated other comprehensive income (loss).  In February 2010, we repaid the remaining $48 million balance of this debt.  At that time, the cumulative amount of CTA related to this debt was a net loss of $140 million, which will remain in accumulated other comprehensive income until ultimate disposition of the underlying Euro investment.

The following tables summarize the notional amounts and respective fair values of Corning's derivative financial instruments for September 30, 2011 and December 31, 2010 (in millions):

			Asset derivatives			Liability derivatives
	Notional amount		Balance sheet location	Fair value		Balance sheet location	Fair value
	2011	2010		2011	2010		2011	2010
Derivatives designated as hedging instruments
Foreign exchange contracts	$  613	$  602	Other current assets	$ 3	$4	Other accrued liabilities	$ (27)	$ (33)
			Other assets	$ 1		Other liabilities	$   (2)
Derivatives not designated as hedging instruments
Foreign exchange contracts	$2,603	$2,946	Other current assets	$ 6	$1	Other accrued liabilities	$(142)	$(122)
						Other liabilities	$ (24)	$ (45)
Total derivatives	$3,216	$3,548		$10	$5		$(195)	$(200)

The following table summarizes the effect of derivative financial instruments on Corning's consolidated financial statements for the three and nine months ended September 30, 2011 (in millions):

	Gain/(loss) recognized in OCI		Gain/(loss) reclassified from accumulated OCI			Gain/(loss) related to ineffectiveness
Derivatives in hedging relationships	Three months ended	Nine months ended	Location	Three months ended	Nine months ended	Location	Three months ended	Nine months ended
	September 30,  2011			September 30,  2011			September 30,  2011
Cash flow hedges
			Cost of sales	$ (3)	$ (7)
Foreign exchange contracts	$(5)	$(24)	Royalties	$(14)	$(28)	Other income, net	$0	$0
Total cash flow hedges	$(5)	$(24)		$(17)	$(35)		$0	$0
Net investment hedges
Foreign denominated debt	$ 0	$   0
Total net investment hedges	$ 0	$   0
			Gain/(loss) recognized in income
Undesignated derivatives			Location	Three months ended	Nine months ended
				September 30,  2011
Foreign exchange contracts			Other income, net	$(61)	$73
Total undesignated				$(61)	$73

The following table summarizes the effect of derivative financial instruments on Corning's consolidated financial statements for the three and nine months ended September 30, 2010 (in millions):

	Gain/(loss) recognized in OCI		Gain/(loss) reclassified from accumulated OCI			Gain/(loss) related to ineffectiveness
Derivatives in hedging relationships	Three months ended	Nine months ended	Location	Three months ended	Nine months ended	Location	Three months ended	Nine months ended
	September 30,  2010			September 30,  2010			September 30,  2010
Cash flow hedges
			Cost of sales	$ 2	$ 7
Foreign exchange contracts	$(34)	$(40)	Royalties	$(8)	$(4)	Other income, net	$0	$0
Total cash flow hedges	$(34)	$(40)		$(6)	$ 3		$0	$0
Net investment hedges
Foreign denominated debt	$   0	$   2
Total net investment hedges	$   0	$   2
			Gain/(loss) recognized in income
Undesignated derivatives			Location	Three months ended	Nine months ended
				September 30,  2010
Foreign exchange contracts			Other income, net	$(97)	$(197)
Total undesignated				$(97)	$(197)