FINANCIAL INSTRUMENTS

Investments

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



Investing Results
In millions	2011			2010			2009
Proceeds from sales of available-for-sale securities	$	764		$	981		$	593
Gross realized gains	$	44		$	69		$	32
Gross realized losses	$	(14	)	$	(26	)	$	(28	)

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



Contractual Maturities of Debt Securities at December 31, 2011
In millions	Amortized Cost		Fair Value
Within one year	$	23	$	24
One to five years	476		520
Six to ten years	480		524
After ten years	229		273
Total	$	1,208	$	1,341

At December 31, 2011, the Company had $1,836 million ($3,200 million at December 31, 2010) of held-to-maturity securities (primarily Treasury Bills) classified as cash equivalents, as these securities had original maturities of three months or less. The Company’s investments in held-to-maturity securities are held at amortized cost, which approximates fair value. At December 31, 2011, the Company had investments in money market funds of $1,090 million classified as cash equivalents ($35 million at December 31, 2010).

The net unrealized gain from mark-to-market adjustments recognized in earnings during 2011 on trading securities held at December 31, 2011 was $26 million ($14 million at December 31, 2010).

The following tables provide the fair value and gross unrealized losses of the Company’s investments that were deemed to be temporarily impaired at December 31, 2011 and 2010, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position:



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.



Temporarily Impaired Securities at December 31, 2010 (1)
	Less than 12 months
In millions	Fair Value		Unrealized Losses
Debt securities:
Government debt (2)	$	62	$	(2	)
Corporate bonds	43		(1		)
Total debt securities	$	105	$	(3	)
Equity securities	52		(3		)
Total temporarily impaired securities	$	157	$	(6	)

(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.

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 2011, 2010 or 2009.

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 2011, other-than-temporary impairment write-downs on investments still held by the Company were $6 million ($5 million in 2010).

The aggregate cost of the Company's cost method investments totaled $179 million at December 31, 2011 ($171 million at December 31, 2010). Due to the nature of these investments, the fair market value is not readily determinable. These investments are reviewed quarterly for impairment indicators. During 2011, the Company's impairment analysis resulted in no reduction in the cost basis of these investments; the analysis in 2010 resulted in a reduction of $16 million for the year ended December 31, 2010.

The following table summarizes the fair value of financial instruments at December 31, 2011 and 2010:



Fair Value of Financial Instruments at December 31
	2011											2010
In millions	Cost			Gain		Loss			Fair Value			Cost			Gain		Loss			Fair Value
Marketable securities: (1)
Debt securities:
Government debt (2)	$	556		$	62	$	—		$	618		$	603		$	40	$	(2	)	$	641
Corporate bonds	652			73		(2		)	723			760			72		(1		)	831
Total debt securities	$	1,208		$	135	$	(2	)	$	1,341		$	1,363		$	112	$	(3	)	$	1,472
Equity securities	646			57		(36		)	667			501			94		(3		)	592
Total marketable securities	$	1,854		$	192	$	(38	)	$	2,008		$	1,864		$	206	$	(6	)	$	2,064
Long-term debt including debt due within one year (3)	$	(21,059	)	$	6	$	(2,736	)	$	(23,789	)	$	(22,360	)	$	175	$	(2,530	)	$	(24,715	)
Derivatives relating to:
Foreign currency	$	—		$	31	$	(17	)	$	14		$	—		$	40	$	(38	)	$	2
Commodities	$	—		$	16	$	(1	)	$	15		$	—		$	14	$	(4	)	$	10


(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 reductions of $23 million at December 31, 2011 and $23 million at December 31, 2010 related to fair value adjustments.

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 December 31, 2011. 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 December 31, 2011, the Company had no open interest rate swaps.

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 December 31, 2011, 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 first 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 December 31, 2011, the Company had futures contracts, options and swaps to buy, sell or exchange commodities. These agreements had various expiration dates primarily in 2012.

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 derivatives 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 December 31, 2011 was $1 million after tax ($2 million after tax at December 31, 2010). During 2011, 2010 and 2009, there was no material impact on the consolidated financial statements due to interest rate hedge ineffectiveness. At December 31, 2011 and 2010, the Company had no open interest rate swaps designated as cash flow hedges.

Current open foreign currency forward contracts hedge the currency risk of forecasted feedstock purchase transactions until March 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 gain from the foreign currency hedges included in AOCI at December 31, 2011 was $2 million after tax (net loss of $4 million after tax at December 31, 2010). During 2011, 2010 and 2009, there was no material impact on the consolidated financial statements due to foreign currency hedge ineffectiveness. At December 31, 2011, 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 $432 million ($827 million at December 31, 2010).

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 December 2012. The effective portion of the mark-to-market effects of the cash flow hedge instruments is recorded in AOCI; it is reclassified to income in the same period or periods that the underlying commodity purchase affects income. Due to the September 1, 2009 sale of TRN, the Company recognized a pretax loss of $56 million for cash flow hedges of forecasted purchases that would not occur as a result of the sale (see Note E). The net loss from commodity hedges included in AOCI at December 31, 2011 was $7 million after tax ($3 million after tax gain at December 31, 2010). During 2011, 2010 and 2009, there was no material impact on the consolidated financial statements due to commodity hedge ineffectiveness. At December 31, 2011 and 2010, the Company had the following aggregate notionals of outstanding commodity forward contracts to hedge forecasted purchases:



Commodity	Dec 31, 2011	Dec 31, 2010	Notional Volume Unit
Crude Oil	0.2	0.1	million barrels
Ethane	1.6	1.6	million barrels
Naphtha	90.0	—	kilotons
Natural Gas	7.4	2.7	million million British thermal units
Ethane / Propane Mix	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. At December 31, 2011 and 2010, the Company had no open interest rate swaps designated as fair value hedges of underlying fixed rate debt obligations.

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 December 31, 2011 and 2010, the Company had no open forward contracts or outstanding options to buy, sell or exchange foreign currencies designated as net foreign investment hedges. At December 31, 2011, the Company had outstanding foreign-currency denominated debt designated as a hedge of net foreign investment of $585 million ($1,250 million at December 31, 2010). The results of hedges of the Company’s net investment in foreign operations included in “Cumulative Translation Adjustments” in AOCI was a net loss of $48 million after tax at December 31, 2011 (net gain of $70 million after tax at December 31, 2010). During 2011, 2010 and 2009 there was no material impact on the consolidated financial statements due to hedge ineffectiveness.

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 hedge accounting criteria for derivatives and hedging. At December 31, 2011 and 2010, the Company had the following aggregate notionals of outstanding commodity contracts:



Commodity	Dec 31, 2011	Dec 31, 2010	Notional Volume Unit
Ethane	2.1	3.8	million barrels
Naphtha	82.5	—	kilotons
Natural Gas	4.6	12.0	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 and interest rate 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 $14,002 million at December 31, 2011 ($13,944 million at December 31, 2010).

The following table provides the fair value and gross balance sheet classification of derivative instruments:



Fair Value of Derivative Instruments at December 31 In millions	Balance Sheet Classification	2011		2010
Asset Derivatives
Derivatives designated as hedges:
Foreign currency	Accounts and notes receivable – Other	$	9	$	9
Commodities	Other current assets (1)	5		7
Total derivatives designated as hedges		$	14	$	16
Derivatives not designated as hedges:
Foreign currency	Accounts and notes receivable – Other	$	66	$	77
Commodities	Other current assets (1)	19		23
Total derivatives not designated as hedges		$	85	$	100
Total asset derivatives		$	99	$	116
Liability Derivatives
Derivatives designated as hedges:
Foreign currency	Accounts payable – Other	$	8	$	20
Commodities	Accounts payable – Other	11		8
Total derivatives designated as hedges		$	19	$	28
Derivatives not designated as hedges:
Foreign currency	Accounts payable – Other	$	53	$	64
Commodities	Accounts payable – Other	9		16
Total derivatives not designated as hedges		$	62	$	80
Total liability derivatives		$	81	$	108


(1)	Included in "Accounts and notes receivable - Other" in the consolidated balance sheets at December 31, 2010.



Effect of Derivative Instruments for the year ended December 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	)	$	(1	)
Cash flow:
Commodities	7			Cost of sales	23			—
Foreign currency	(10		)	Cost of sales	(17		)	—
Net foreign investment:
Foreign currency	—			n/a	—			—
Total derivatives designated as hedges	$	(3	)		$	5		$	(1	)
Derivatives not designated as hedges:
Foreign currency (6)	$	—		Sundry income (expense) – net	$	—		$	1
Commodities	—			Cost of sales	—			20
Total derivatives not designated as hedges	$	—			$	—		$	21
Total derivatives	$	(3	)		$	5		$	20


Effect of Derivative Instruments for the year ended December 31, 2010 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	)	$	(2	)
Cash flow:
Commodities	(10		)	Cost of sales	(14		)	—
Foreign currency	1			Cost of sales	—			—
Net foreign investment:
Foreign currency	(16		)	n/a	—			—
Total derivatives designated as hedges	$	(25	)		$	(15	)	$	(2	)
Derivatives not designated as hedges:
Foreign currency (6)	$	—		Sundry income (expense) – net	$	—		$	155
Commodities	—			Cost of sales	—			5
Total derivatives not designated as hedges	$	—			$	—		$	160
Total derivatives	$	(25	)		$	(15	)	$	158

(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 consolidated statements of equity; net unrealized gains (losses) from hedges related to foreign currency (net of tax) are included in “Cumulative Translation Adjustments – Translation adjustments” in the consolidated statements of equity.

(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.



Effect of Derivative Instruments for the year ended December 31, 2009 In millions	Change in Unrealized 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:
Interest rates	—			Cost of sales	(9		)	—
Interest rates	—			Interest expense (5)	(1		)	—
Commodities	(2		)	Cost of sales	(306		)	(1		)
Foreign currency	(10		)	Cost of sales	11			—
Total derivatives designated as hedges	$	(12	)		$	(305	)	$	(2	)
Derivatives not designated as hedges:
Foreign currency (6)	$	—		Sundry income (expense) – net	$	—		$	(32	)
Commodities	—			Cost of sales	—			3
Total derivatives not designated as hedges	$	—			$	—		$	(29	)
Total derivatives	$	(12	)		$	(305	)	$	(31	)


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

(2)

(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 $7 million loss for commodity contracts and a $2 million gain for foreign currency contracts.