FINANCIAL INSTRUMENTS

Investments

The Company’s investments in marketable securities are primarily classified as available-for-sale.



Investing Results	Three Months Ended
In millions	Mar 31, 2012			Mar 31, 2011
Proceeds from sales of available-for-sale securities	$	134		$	190
Gross realized gains	$	5		$	9
Gross realized losses	$	(4	)	$	(1	)

The following table summarizes the contractual maturities of the Company’s investments in debt securities:



Contractual Maturities of Debt Securities at March 31, 2012
In millions	Amortized Cost		Fair Value
Within one year	$	28	$	29
One to five years	454		498
Six to ten years	505		546
After ten years	235		274
Total	$	1,222	$	1,347

At March 31, 2012, the Company had $1,700 million held-to-maturity securities (primarily Treasury Bills) classified as cash equivalents, as these securities had original maturities of three months or less ($1,836 million at December 31, 2011). The Company’s investments in held-to-maturity securities are held at amortized cost, which approximates fair value. At March 31, 2012, the Company had investments in money market funds of $3 million classified as cash equivalents ($1,090 million at December 31, 2011).

The net unrealized gain recognized during the first quarter of 2012 on trading securities held at March 31, 2012 was $24 million ($11 million during the three-month period ended March 31, 2011).

The following tables provide the fair value and gross unrealized losses of the Company’s investments that were deemed to be temporarily impaired at March 31, 2012 and December 31, 2011, aggregated by investment category:



Temporarily Impaired Securities at March 31, 2012 (1)
	Less than 12 months
In millions	Fair Value		Unrealized Losses
Debt securities:
Government debt (2)	$	23	$	—
Corporate bonds	55		(1		)
Total debt securities	$	78	$	(1	)
Equity securities	157		(8		)
Total temporarily impaired securities	$	235	$	(9	)


(1)	Unrealized losses of 12 months or more were less than $1 million.


(2)	U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations, with unrealized losses of less than $1 million.



Temporarily Impaired Securities at December 31, 2011 (1)
	Less than 12 months
In millions	Fair Value		Unrealized Losses
Debt securities:
Corporate bonds	$	44	$	(2	)
Equity securities	190		(36		)
Total temporarily impaired securities	$	234	$	(38	)


(1)	Unrealized losses of 12 months or more were less than $1 million.

Portfolio managers regularly review the Company’s holdings to determine if any investments are other-than-temporarily impaired. The analysis includes reviewing the amount of the impairment, as well as the length of time it has been impaired. In addition, specific guidelines for each instrument type are followed to determine if an other-than-temporary impairment has occurred.

For debt securities, the credit rating of the issuer, current credit rating trends, the trends of the issuer’s overall sector, the ability of the issuer to pay expected cash flows and the length of time the security has been in a loss position are considered in determining whether unrealized losses represent an other-than-temporary impairment. The Company did not have any credit-related losses during the first quarters of 2012 or 2011.

For equity securities, the Company’s investments are primarily in Standard & Poor’s (“S&P”) 500 companies; however, the Company’s policies allow investments in companies outside of the S&P 500. The largest holdings are Exchange Traded Funds that represent the S&P 500 index or an S&P 500 sector or subset; the Company also has holdings in Exchange Traded Funds that represent emerging markets. The Company considers the evidence to support the recovery of the cost basis of a security including volatility of the stock, the length of time the security has been in a loss position, value and growth expectations, and overall market and sector fundamentals, as well as technical analysis, in determining whether unrealized losses represent an other-than-temporary impairment. In the first quarter of 2012, other-than-temporary impairment write-downs on investments still held by the Company were $4 million ($2 million in the first quarter of 2011).

The aggregate cost of the Company’s cost method investments totaled $186 million at March 31, 2012 and $179 million at December 31, 2011. Due to the nature of these investments, the fair market value is not readily determinable. These investments are reviewed quarterly for impairment indicators. At March 31, 2012, the Company's impairment analysis resulted in no reduction in the cost basis of these investments (no reduction at March 31, 2011).

The following table summarizes the fair value of financial instruments at March 31, 2012 and December 31, 2011:



Fair Value of Financial Instruments
	At March 31, 2012											At December 31, 2011
In millions	Cost			Gain		Loss			Fair Value			Cost			Gain		Loss			Fair Value
Marketable securities: (1)
Debt securities:
Government debt (2)	$	549		$	53	$	—		$	602		$	556		$	62	$	—		$	618
Corporate bonds	673			73		(1		)	745			652			73		(2		)	723
Total debt securities	$	1,222		$	126	$	(1	)	$	1,347		$	1,208		$	135	$	(2	)	$	1,341
Equity securities	649			110		(8		)	751			646			57		(36		)	667
Total marketable securities	$	1,871		$	236	$	(9	)	$	2,098		$	1,854		$	192	$	(38	)	$	2,008
Long-term debt incl. debt due within one year (3)	$	(20,022	)	$	41	$	(2,799	)	$	(22,780	)	$	(21,059	)	$	6	$	(2,736	)	$	(23,789	)
Derivatives relating to:
Foreign currency (4)	$	—		$	31	$	(16	)	$	15		$	—		$	31	$	(17	)	$	14
Commodities (5)	$	—		$	21	$	(8	)	$	13		$	—		$	16	$	(1	)	$	15


(1)	Included in “Other investments” in the consolidated balance sheets.


(2)	U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations.


(3)	Cost includes fair value adjustments of $23 million at March 31, 2012 and $23 million at December 31, 2011.


(4)	Includes immaterial gains and losses related to interest rate risk management positions.


(5)	Presented net of cash collateral, as disclosed in Note H.

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 March 31, 2012. 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 2012.

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 March 31, 2012, the Company had open interest rate swaps with maturity dates that extend to 2019.

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 March 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 second quarter of 2012.

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 March 31, 2012, the Company had futures contracts, options and swaps to buy, sell or exchange commodities. These agreements had various expiration dates through second quarter of 2014.

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 derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current period income.

The net loss from previously terminated interest rate cash flow hedges included in AOCI at March 31, 2012 was $1 million after tax ($1 million after tax at December 31, 2011). The Company had open interest rate derivatives designated as cash flow hedges at March 31, 2012 with a notional U.S. dollar equivalent of $263 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 May 2012. 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 March 31, 2012 was $1 million after tax (net gain of $2 million after tax at December 31, 2011). At March 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 $102 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 June 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 loss from commodity hedges included in AOCI at March 31, 2012 was $18 million after tax ($7 million at December 31, 2011). At March 31, 2012 and December 31, 2011, the Company had the following aggregate notionals of outstanding commodity forward and futures contracts to hedge forecasted purchases:



Commodity	Mar 31, 2012	Dec 31, 2011	Notional Volume Unit
Corn	2.5	0.6	million bushels
Crude Oil	—	0.2	million barrels
Ethane	2.8	1.6	million barrels
Naphtha	—	90.0	kilotons
Natural Gas	139.7	7.4	million million British thermal units
Ethane / Propane Mix	0.2	0.2	million barrels

Fair Value Hedges

For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current period income and reflected as “Interest expense and amortization of debt discount” in the consolidated statements of income. The short-cut method is used when the criteria are met. The Company had no open interest rate swaps designated as fair value hedges of underlying fixed rate debt obligations at March 31, 2012 or December 31, 2011.

Net Foreign Investment Hedges

For derivative instruments that are designated and qualify as net foreign investment hedges, the effective portion of the gain or loss on the derivative is included in “Cumulative Translation Adjustments” in AOCI. At March 31, 2012 and December 31, 2011, the Company had no open forward contracts or outstanding options to buy, sell or exchange foreign currencies designated as net foreign investment hedges. At March 31, 2012, the Company had outstanding foreign-currency denominated debt designated as a hedge of net foreign investment of $582 million ($585 million at December 31, 2011). The results of hedges of the Company’s net investment in foreign operations included in “Cumulative Translation Adjustments” in AOCI was a net gain of $2 million after tax at March 31, 2012 (net loss of $48 million after tax at December 31, 2011). See Note P for further detail on changes in AOCI.

Other Derivative Instruments

The Company utilizes futures, options and swap instruments that are effective as economic hedges of commodity price exposures, but do not meet the hedge accounting criteria in the accounting criteria for derivatives and hedging. At March 31, 2012 and December 31, 2011, the Company had the following aggregate notionals of outstanding commodity contracts:



Commodity	Mar 31, 2012	Dec 31, 2011	Notional Volume Unit
Ethane	1.3	2.1	million barrels
Naphtha	50.0	82.5	kilotons
Natural Gas	4.0	4.6	million million British thermal units

The Company also uses foreign exchange forward contracts, options, and cross-currency swaps that are not designated as hedging instruments primarily to manage foreign currency exposure. The Company had open foreign exchange contracts with various expiration dates to buy, sell or exchange foreign currencies and a notional U.S. dollar equivalent of $15,677 million at March 31, 2012 ($14,002 million at December 31, 2011) and open interest rate swaps with a notional U.S. dollar equivalent of $231 million at March 31, 2012 (no open interest rate swaps at December 31, 2011).

The following table provides the fair value and gross balance sheet classification of derivative instruments at March 31, 2012 and December 31, 2011:



Fair Value of Derivative Instruments In millions	Balance Sheet Classification	Mar 31, 2012		Dec 31, 2011
Asset Derivatives
Derivatives designated as hedges:
Foreign currency	Accounts and notes receivable – Other	$	—	$	9
Commodities	Other current assets	7		5
Total derivatives designated as hedges		$	7	$	14
Derivatives not designated as hedges:
Foreign currency	Accounts and notes receivable – Other	$	52	$	66
Commodities	Other current assets	15		19
Total derivatives not designated as hedges		$	67	$	85
Total asset derivatives		$	74	$	99
Liability Derivatives
Derivatives designated as hedges:
Foreign currency	Accounts payable – Other	$	2	$	8
Commodities	Accounts payable – Other	39		11
Total derivatives designated as hedges		$	41	$	19
Derivatives not designated as hedges:
Foreign currency	Accounts payable – Other	$	35	$	53
Commodities	Accounts payable – Other	7		9
Total derivatives not designated as hedges		$	42	$	62
Total liability derivatives		$	83	$	81

The following tables provide the gain and loss impact of derivative instruments in the consolidated statements of income and AOCI for the three months ended March 31, 2012 and 2011:



Effect of Derivative Instruments for the three months ended March 31, 2012 In millions	Change in Unrealized Gain (Loss) in AOCI (1,2)			Income Statement Classification	Gain (Loss) Reclassified from AOCI to Income (3)			Additional Gain (Loss) Recognized in Income (3,4)
Derivatives designated as hedges:
Fair Value:
Interest rates	$	—		Interest expense (5)	$	—		$	—
Cash flow:
Commodities	(18		)	Cost of sales	(11		)	—
Foreign currency	(2		)	Cost of sales	1			—
Total derivatives designated as hedges	$	(20	)		$	(10	)	$	—
Derivatives not designated as hedges:
Foreign currency (6)	$	—		Sundry income (expense) – net	$	—		$	3
Commodities	—			Cost of sales	—			—
Total derivatives not designated as hedges	$	—			$	—		$	3
Total derivatives	$	(20	)		$	(10	)	$	3


Effect of Derivative Instruments for the three months ended March 31, 2011 In millions	Change in Unrealized Gain (Loss) in AOCI (1,2)			Income Statement Classification	Gain (Loss) Reclassified from AOCI to Income (3)			Additional Gain (Loss) Recognized in Income (3,4)
Derivatives designated as hedges:
Fair Value:
Interest rates	$	—		Interest expense (5)	$	—		$	(1	)
Cash flow:
Commodities	5			Cost of sales	5			—
Foreign currency	(11		)	Cost of sales	2			—
Total derivatives designated as hedges	$	(6	)		$	7		$	(1	)
Derivatives not designated as hedges:
Foreign currency (6)	$	—		Sundry income (expense) – net	$	—		$	(1	)
Commodities	—			Cost of sales	—			1
Total derivatives not designated as hedges	$	—			$	—		$	—
Total derivatives	$	(6	)		$	7		$	(1	)


(1)	Accumulated other comprehensive income (loss) (“AOCI”).

(2)

Net unrealized gains (losses) from hedges related to interest rates and commodities are included in “Accumulated Derivative Loss – Net hedging results” in the Accumulated Other Comprehensive Income (Loss) table; net unrealized gains (losses) from hedges related to foreign currency (net of tax) are included in “Cumulative Translation Adjustments – Translation adjustments” in the Accumulated Other Comprehensive Income (Loss) table. See Note P.


(3)	Pretax amounts.


(4)	Amounts impacting income not related to AOCI reclassification; also includes immaterial amounts of hedge ineffectiveness.


(5)	Interest expense and amortization of debt discount.


(6)	Foreign currency derivatives not designated as hedges are offset by foreign exchange gains (losses) resulting from the underlying exposures of foreign currency denominated assets and liabilities.

The net after-tax amounts to be reclassified from AOCI to income within the next 12 months are a $1 million loss for interest rate contracts, a $13 million loss for commodity contracts and a $1 million loss for foreign currency contracts.