Hedging Activities

3 Months Ended

Mar. 31, 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.

The amount of hedge ineffectiveness at March 31, 2012 and at December 31, 2011 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.  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 March 31, 2012, the amount of net gains expected to be reclassified into earnings within the next 12 months is $31 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 March 31, 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	$  490	$  402	Other current assets	$ 32	$ 6	Other accrued liabilities	$  (1)	$   (8)
Benchmark interest rate		$  500	Other assets			Other liabilities		$ (33)
Derivatives not designated as hedging instruments
Foreign exchange contracts	$2,469	$3,094	Other current assets	$ 69	$ 6	Other accrued liabilities	$(14)	$(122)
						Other liabilities	$  (3)	$   (6)
Total derivatives	$2,959	$3,996		$101	$12		$(18)	$(169)

The following tables summarize the effect of derivative financial instruments on Corning's consolidated financial statements (in millions):

	Effect of derivative instruments on the consolidated financial statements for the quarter ended March 31
Derivatives in hedging relationships	Gain/(loss) recognized in other comprehensive income (OCI)		Location of gain/(loss) reclassified from accumulated OCI into income (effective)	Gain reclassified from accumulated OCI into income (effective) (1)
	2012	2011		2012	2011
Cash flow hedges
			Cost of sales	$1	$2
Foreign exchange contracts	$31	$(18)	Royalties	$3	$7
Total cash flow hedges	$31	$(18)		$4	$9

(1)      The amount of hedge ineffectiveness at March 31, 2012 and 2011 was insignificant.

Undesignated derivatives	Location of gain/ (loss) recognized in income	Gain recognized in  income
		2012	2011
Foreign exchange contracts	Other income, net	$138	$143
Total undesignated		$138	$143