FINANCIAL INSTRUMENTS

The following table summarizes the fair value of financial instruments at December 31, 2016 and 2015:



Fair Value of Financial Instruments at December 31
	2016											2015
In millions	Cost			Gain		Loss			Fair Value			Cost			Gain		Loss			Fair Value
Marketable securities: (1)
Debt securities:
Government debt (2)	$	607		$	13	$	(12	)	$	608		$	597		$	22	$	(7	)	$	612
Corporate bonds	623			27		(5		)	645			633			26		(8		)	651
Total debt securities	$	1,230		$	40	$	(17	)	$	1,253		$	1,230		$	48	$	(15	)	$	1,263
Equity securities	658			98		(50		)	706			555			108		(60		)	603
Total marketable securities	$	1,888		$	138	$	(67	)	$	1,959		$	1,785		$	156	$	(75	)	$	1,866
Long-term debt including debt due within one year (3)	$	(21,091	)	$	129	$	(1,845	)	$	(22,807	)	$	(16,756	)	$	424	$	(1,668	)	$	(18,000	)
Derivatives relating to:
Interest rates	$	—		$	—	$	(5	)	$	(5	)	$	—		$	—	$	(4	)	$	(4	)
Commodities (4)	$	—		$	56	$	(213	)	$	(157	)	$	—		$	6	$	(248	)	$	(242	)
Foreign currency	$	—		$	84	$	(30	)	$	54		$	—		$	109	$	(32	)	$	77


(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 $18 million at December 31, 2016 and $18 million at December 31, 2015.


(4)	Presented net of cash collateral, as disclosed in Note 12.

Cost approximates fair value for all other financial instruments.

Investments

The Company’s investments in marketable securities are primarily classified as available-for-sale securities. The following table provides the investing results from available-for-sale securities for the years ended December 31, 2016, 2015 and 2014.



Investing Results
In millions	2016			2015			2014
Proceeds from sales of available-for-sale securities	$	535		$	565		$	675
Gross realized gains	$	58		$	96		$	99
Gross realized losses	$	(2	)	$	(14	)	$	(6	)

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



Contractual Maturities of Debt Securities at December 31, 2016
In millions	Amortized Cost		Fair Value
Within one year	$	33	$	32
One to five years	331		341
Six to ten years	665		664
After ten years	201		216
Total	$	1,230	$	1,253

At December 31, 2016, the Company had $261 million ($3,354 million at December 31, 2015) of held-to-maturity securities (primarily Treasury Bills) classified as cash equivalents, as these securities had maturities of three months or less at the time of purchase. The Company’s investments in held-to-maturity securities are held at amortized cost, which approximates fair value. At December 31, 2016, the Company had investments in money market funds of $239 million classified as cash equivalents ($1,689 million at December 31, 2015).

The net unrealized gain/loss from mark-to-market adjustments recognized in earnings on trading securities held at the end of the year was a $6 million loss in 2016, a $2 million loss in 2015 and a $3 million gain in 2014.

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, 2016 and 2015, aggregated by investment category:



Temporarily Impaired Securities at December 31, 2016
	Less than 12 months					12 months or more					Total
In millions	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Government debt (1)	$	351	$	(12	)	$	—	$	—		$	351	$	(12	)
Corporate bonds	193		(4		)	16		(1		)	209		(5		)
Equity securities	48		(6		)	163		(44		)	211		(50		)
Total temporarily impaired securities	$	592	$	(22	)	$	179	$	(45	)	$	771	$	(67	)


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



Temporarily Impaired Securities at December 31, 2015
	Less than 12 months					12 months or more					Total
In millions	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Government debt (1)	$	251	$	(7	)	$	1	$	—		$	252	$	(7	)
Corporate bonds	175		(8		)	1		—			176		(8		)
Equity securities	197		(54		)	10		(6		)	207		(60		)
Total temporarily impaired securities	$	623	$	(69	)	$	12	$	(6	)	$	635	$	(75	)


(1)	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 2016, 2015 or 2014.

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 2016, there were no other-than-temporary impairment write-downs on investments still held by the Company ($2 million in 2015).

The aggregate cost of the Company's cost method investments totaled $120 million at December 31, 2016 ($157 million at December 31, 2015). Due to the nature of these investments, either the cost basis approximates fair market value or fair value is not readily determinable. These investments are reviewed quarterly for impairment indicators. In 2016, a write-down of $4 million was recorded as part of the 2016 restructuring charge. In 2015, a write-down of $55 million was recorded as part of the 2015 restructuring charge. See Note 3 for more information on the Company's restructuring activities. The Company's impairment analysis resulted in no additional reductions in the cost basis of these investments for the year ended December 31, 2016; the analysis in 2015 resulted in additional reductions of less than $1 million for the year ended December 31, 2015.

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, 2016. 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 2017.

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, 2016, the Company had open interest rate swaps with maturity dates that extend to 2021.

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, 2016, the Company had forward contracts, options and cross-currency swaps to buy, sell or exchange foreign currencies. These contracts had various expiration dates, through the first quarter of 2018.

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, 2016, the Company had futures contracts, options and swaps to buy, sell or exchange commodities. These agreements had various expiration dates through the fourth quarter of 2020.

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 loss” (“AOCL”); it is reclassified to “Cost of sales” in the same period or periods that the hedged transaction affects income. The unrealized amounts in AOCL fluctuate based on changes in the fair value of open contracts at the end of each reporting period. The Company anticipates volatility in AOCL 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 derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current period income.

The Company had open interest rate derivatives designated as cash flow hedges at December 31, 2016, with a net loss of $4 million after tax and a notional U.S. dollar equivalent of $245 million (net loss of $3 million after tax and a notional U.S. dollar equivalent of $338 million at December 31, 2015).

Current open foreign currency forward contracts hedge the currency risk of forecasted feedstock purchase transactions until September 2017. The effective portion of the mark-to-market effects of the foreign currency contracts is recorded in AOCL; 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 AOCL at December 31, 2016 was $22 million after tax (net gain of $4 million after tax at December 31, 2015). In 2016, 2015 and 2014, there was no material impact on the consolidated financial statements due to foreign currency hedge ineffectiveness. At December 31, 2016, the Company had open contracts with various expiration dates to buy, sell or exchange foreign currencies with a notional U.S. dollar equivalent of $1,411 million ($398 million at December 31, 2015).

Commodity swaps, futures and option contracts with maturities of not more than 48 months are utilized and designated as cash flow hedges of forecasted commodity purchases. Current open contracts hedge forecasted transactions until December 2020. The effective portion of the mark-to-market effect of the cash flow hedge instrument is recorded in AOCL; 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 AOCL at December 31, 2016 was $99 million after tax ($180 million after tax loss at December 31, 2015). In 2016, 2015 and 2014, there was no material impact on the consolidated financial statements due to commodity hedge ineffectiveness. At December 31, 2016 and 2015, the Company had the following gross aggregate notionals of outstanding commodity forward, options and futures contracts to hedge forecasted purchases:



Commodity	Dec 31, 2016	Dec 31, 2015	Notional Volume Unit
Corn	0.4	1.0	million bushels
Crude Oil	0.6	0.4	million barrels
Ethane	3.6	—	million barrels
Natural Gas	78.6	257.4	million British thermal units
Propane	1.5	—	million barrels
Soybeans	—	1.4	million bushels

The net after-tax amounts to be reclassified from AOCL to income within the next 12 months are a $14 million gain for commodity contracts, a $22 million gain for foreign currency contracts and a $2 million loss for interest rate contracts.

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. During 2015, the Company entered into and subsequently terminated an interest rate swap designated as a fair value hedge of an underlying fixed rate debt obligation with a maturity date of May 2019. The fair value adjustment resulting from this swap was a gain on the derivative of less than $1 million. At December 31, 2016 and 2015, 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 AOCL. The Company had open foreign currency contracts designated as net foreign investment hedges with a gross notional U.S. dollar equivalent of $2,641 million at December 31, 2016 (zero at December 31, 2015). In addition, at December 31, 2016, the Company had outstanding foreign-currency denominated debt designated as a hedge of net foreign investment of $172 million ($166 million at December 31, 2015). The results of hedges of the Company’s net investment in foreign operations included in “Cumulative Translation Adjustments” in AOCL was a net gain of $1 million after tax for the period ended December 31, 2016 (net gain of $1 million after tax for the period ended December 31, 2015). In 2016, 2015 and 2014 there was no material impact on the consolidated financial statements due to hedge ineffectiveness. See Note 24 for further detail on changes in AOCL.

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, 2016 and 2015, the Company had the following gross aggregate notionals of outstanding commodity contracts:



Commodity	Dec 31, 2016	Dec 31, 2015	Notional Volume Unit
Ethane	2.6	—	million barrels
Gasoline	30.0	—	kilotons
Naphtha Price Spread	50.0	15.0	kilotons
Propane	2.7	0.5	million barrels

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 and cross-currency swaps with various expiration dates to buy, sell or exchange foreign currencies with a gross notional U.S. dollar equivalent of $12,388 million at December 31, 2016 ($14,515 million at December 31, 2015) and had no open interest rate swaps at December 31, 2016 and December 31, 2015.

The following table provides the fair value and gross balance sheet classification of derivative instruments at December 31, 2016 and 2015:



Fair Value of Derivative Instruments In millions	Balance Sheet Classification	2016		2015
Asset Derivatives
Derivatives designated as hedges:
Commodities	Other current assets	$	42	$	3
Commodities	Deferred charges and other assets	10		—
Foreign currency	Accounts and notes receivable – Other	90		5
Total derivatives designated as hedges		$	142	$	8
Derivatives not designated as hedges:
Commodities	Other current assets	$	13	$	4
Commodities	Deferred charges and other assets	12		—
Foreign currency	Accounts and notes receivable – Other	103		156
Total derivatives not designated as hedges		$	128	$	160
Total asset derivatives		$	270	$	168
Liability Derivatives
Derivatives designated as hedges:
Interest rates	Accrued and other current liabilities	$	3	$	3
Interest rates	Other noncurrent obligations	2		1
Commodities	Accrued and other current liabilities	32		28
Commodities	Other noncurrent obligations	196		234
Foreign currency	Accrued and other current liabilities	55		1
Total derivatives designated as hedges		$	288	$	267
Derivatives not designated as hedges:
Commodities	Accrued and other current liabilities	$	4	$	—
Commodities	Other noncurrent obligations	2		—
Foreign currency	Accounts payable – Other	84		83
Total derivatives not designated as hedges		$	90	$	83
Total liability derivatives		$	378	$	350

Foreign currency derivatives not designated as hedges are offset by foreign exchange gains or losses resulting from the underlying exposures of foreign currency denominated assets and liabilities. The amount charged on a pretax basis related to foreign currency derivatives not designated as a hedge, which is included in "Sundry income (expense) - net" in the consolidated statements of income, was a loss of $180 million for 2016, loss of $318 million for 2015 and loss of $333 million for 2014. See Note 13 for the net impact of foreign exchange transactions.