Corning is exposed to interest rate and foreign currency risks due to the movement of these rates.

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, South Korean won, new Taiwan dollar, Chinese yuan, the euro and British pound. We seek to mitigate the impact of exchange rate movements in our income statement by using over-the-counter (OTC) derivative instruments including foreign exchange forward and option contracts. In general, these hedge expirations coincide with the timing of the underlying foreign currency commitments and transactions.

We are exposed to potential losses in the event of non-performance by our counterparties to these derivative contracts. However, we minimize this risk by maintaining our portfolio with a diverse group of highly-rated major financial institutions. 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 Company qualified for and elected the end-user exception to the mandatory swap clearing requirement of the Dodd-Frank Act.

14.Hedging Activities (continued)

Cash Flow Hedges

Our cash flow hedging activities utilize OTC foreign exchange forward contracts to reduce the risk that movements in exchange rates will adversely affect the net cash flows resulting from the sale of products to customers and purchases from suppliers. The total gross notional values for foreign currency cash flow hedges are $2.1 billion and $0.4 billion at December 31, 2019 and 2018, respectively. The majority of our foreign exchange forward contracts hedge a portion of the Company’s exposure to the Japanese yen denominated sales with maturities spanning the years 2020-2023 and with gross notional values of $1.5 billion at December 31, 2019.

Our cash flow hedging activity also uses interest rate derivatives including Treasury rate lock agreements to reduce the risk of increases in benchmark interest rates on the probable issuance of debt. In the second quarter of 2018, the Company entered into Treasury rate lock agreements to hedge against the variability in cash flows due to changes in the benchmark interest rate related to an anticipated debt issuance. The instruments were designated as cash flow hedges, and were settled on October 31, 2018 concurrent with the debt issuance. The settlement amount of $16 million received is released from accumulated other comprehensive income into earnings when the corresponding interest expense occurs each period.

Corning uses regression analysis or critical term match method to assess initial hedge effectiveness. Following the inception of a hedging relationship, hedge effectiveness is assessed quarterly based on qualitative factors. Corning defers gains and losses related to the cash flow hedges into accumulated other comprehensive loss on the consolidated balance sheets until the hedged item impacts earnings. At December 31, 2019, the amount expected to be reclassified into earnings within the next 12 months is a pre-tax net gain of $30 million.

Undesignated Hedges

Corning also uses OTC foreign exchange forward and option contracts that are not designated as hedged instruments. These contracts are used to offset economic currency risks. The undesignated hedges limit exposures to foreign functional currency fluctuations related to certain subsidiaries’ monetary assets, monetary liabilities and net earnings in foreign currencies.

A significant portion of the Company’s non-U.S. revenues and expenses are denominated in Japanese yen, South Korean won, new Taiwan dollar, Chinese yuan and euro. When these revenues and expenses are translated back to U.S. dollars, the Company is exposed to foreign exchange rate movements. To protect translated earnings against movements in these currencies, the Company has entered into a series of average rate forwards and other derivative instruments.

The Company continued its foreign exchange hedge program in 2019 and entered into a series of average rate forwards, and purchased put or call options. These will hedge a significant portion of its projected yen exposure for the period of 2020-2023. As of December 31, 2019, the U.S. dollar gross notional value of the yen average rate forwards program is $7.7 billion and $2.5 billion for zero-cost collars and purchased put or call options. The average rate forward program was also expanded to partially hedge the impact of the South Korean won, Chinese yuan, euro, new Taiwan dollar and British pound translation on the Company’s projected net income. As of December 31, 2019, these average rate forwards have a total notional value of $2.0 billion. The entire average rate forward program will settle net without obligation to deliver Japanese yen, South Korean won, Chinese yuan, euro and British pound. With respect to the zero-cost collars, the gross notional amount includes the value of both put and call options. However, due to the nature of the zero-cost collars, only the put or the call option can be exercised at maturity.

The fair values of these derivative contracts are recorded as either assets (gain position) or liabilities (loss position) on the consolidated balance sheets. Changes in the fair value of the derivative contracts are recorded currently in earnings in the translated earnings contract gain (loss), net line of the consolidated statements of income (loss).

The following table summarizes the notional amounts and respective fair values of Corning’s derivative financial instruments on a gross basis for December 31, 2019 and 2018 (in millions):



					Asset derivatives					Liability derivatives
	Notional amount					Fair value					Fair value
	2019		2018		Balance sheet ‎location	2019		2018		Balance sheet ‎location	2019		2018
Derivatives ‎ designated as ‎ hedging ‎ instruments
Foreign exchange ‎ contracts	$	2,123	$	391	Other current ‎assets	$	38	$	4	Other accrued ‎liabilities	$	(7)	$	(2)
					Other assets		37		2	Other liabilities		(4)

Derivatives not ‎ designated as ‎ hedging ‎ instruments

Foreign exchange ‎ contracts and other		1,815		900	Other current ‎assets		5		5	Other accrued ‎liabilities		(19)		(7)
					Other assets		21
Translated earnings ‎ contracts		12,166		13,620	Other current ‎assets		114		94	Other accrued ‎liabilities		(74)		(47)
					Other assets		34		43	Other liabilities		(161)		(386)

Total derivatives	$	16,104	$	14,911		$	249	$	148		$	(265)	$	(442)

The following tables summarize the effect on the consolidated financial statements relating to Corning’s derivative financial instruments (in millions):



	Effect of derivative instruments on the consolidated financial statements for the years ended December 31
Derivatives in hedging	Gain (loss) recognized in other ‎comprehensive income (OCI)						Location of gain (loss) reclassified from ‎accumulated OCI into income	Gain (loss) reclassified from ‎ accumulated OCI into income (1)
relationships	2019		2018		2017		effective (ineffective)	2019		2018		2017

Cash flow hedges
							Net sales					$	1
Interest rate hedge			$	16			Cost of sales	$	11	$	13		(12)
Foreign exchange contracts	$	72		(5)	$	38	Other expense, net				(1)		(2)

Total cash flow hedges	$	72	$	11	$	38		$	11	$	12	$	(13)



		Gain (loss) recognized in income
Undesignated ‎derivatives	Location of gain (loss) ‎recognized in income	2019		2018		2017
Foreign exchange and other contracts – ‎ balance sheet, loans and other	Other income (expense), net	$	21	$	22	$	(16)
Translated earnings contracts	Translated earnings contract gain (loss), net		248		(93)		(121)

Total undesignated		$	269	$	(71)	$	(137)

(1)The effect of gain (loss) reclassified from accumulated OCI into income is not material to the financial statement line items in which effects of cash flow hedges are recorded for 2019, 2018 and 2017.