Hedging Activities

6 Months Ended

Jun. 30, 2012

Hedging Activities [Abstract]

Hedging Activities

12.      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 exposures, which include forecasted transactions, 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 such counterparty default.  Neither we nor our counterparties are required to post collateral for these financial instruments.

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.  Our cash flow hedging activity also utilizes interest rate forwards to reduce the risk of changes in benchmark interest rate from the probable forecasted issuance of debt.  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 June 30, 2012, the amount of net gain expected to be reclassified into earnings within the next 12 months is $15 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.

The following tables summarize the notional amounts and respective fair values of Corning's derivative financial instruments for June 30, 2012 and December 31, 2011 (in millions):

			Asset derivatives			Liability derivatives
	Notional amount		Balance sheet location	Fair value		Balance sheet location	Fair value
	2012	2011		2012	2011		2012	2011
Derivatives designated as hedging instruments
Foreign exchange contracts	$  484	$  402	Other current assets	$17	$ 6	Other accrued liabilities	$  (2)	$   (8)
Benchmark interest rate		$  500	Other assets	$ 2		Other liabilities		$ (33)
Derivatives not designated as hedging instruments
Foreign exchange contracts	$2,595	$3,094	Other current assets	$30	$ 6	Other accrued liabilities	$(32)	$(122)
						Other liabilities	$  (4)	$   (6)
Total derivatives	$3,079	$3,996		$49	$12		$(38)	$(169)

The following table summarizes the effect of derivative financial instruments on Corning's consolidated financial statements for the three and six months ended June 30, 2012 (in millions):

	(Loss)/gain recognized in OCI		Gain reclassified from accumulated OCI into income (effective) (1)
Derivatives in hedging relationships	Three months ended June 30, 2012	Six months ended June 30, 2012	Location	Three months ended June 30, 2012	Six months ended June 30, 2012
Cash flow hedges
			Cost of sales	$2	$3
Foreign exchange contracts	$(14)	$17	Royalties	$3	$6
Total cash flow hedges	$(14)	$17		$5	$9
			(Loss)/gain recognized in income
Undesignated derivatives			Location	Three months ended June 30, 2012	Six months ended June 30, 2012
Foreign exchange contracts			Other income, net	$(41)	$97
Total undesignated				$(41)	$97

(1) The amount of hedge ineffectiveness for the three and six months ended June 30, 2012 was insignificant.

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

	Loss recognized in OCI		Loss reclassified from accumulated OCI into income (effective) (1)
Derivatives in hedging relationships	Three months ended June 30, 2011	Six months ended June 30, 2011	Location	Three months ended June 30, 2011	Six months ended June 30, 2011
Cash flow hedges
			Cost of sales	$(2)	$  (4)
Foreign exchange contracts	$(1)	$(19)	Royalties	$(7)	$(14)
Total cash flow hedges	$(1)	$(19)		$(9)	$(18)
			(Loss)/gain recognized in income
Undesignated derivatives			Location	Three months ended June 30, 2011	Six months ended June 30, 2011
Foreign exchange contracts			Other income, net	$(10)	$133
Total undesignated				$(10)	$133

(1) The amount of hedge ineffectiveness for the three and six months ended June 30, 2011 was insignificant.