FINANCIAL INSTRUMENTS

A summary of the Company's financial instruments, risk management policies, derivative instruments and hedging activities can be found in Note 11 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016. If applicable, updates have been included in the respective section below.

The following table summarizes the fair value of financial instruments at September 30, 2017 and December 31, 2016:



Fair Value of Financial Instruments	Sep 30, 2017											Dec 31, 2016
In millions	Cost			Gain		Loss			Fair Value			Cost			Gain		Loss			Fair Value
Other investments:
Debt securities:
Government debt ¹	$	597		$	14	$	(8	)	$	603		$	607		$	13	$	(12	)	$	608
Corporate bonds	630			32		(2		)	660			623			27		(5		)	645
Total debt securities	$	1,227		$	46	$	(10	)	$	1,263		$	1,230		$	40	$	(17	)	$	1,253
Equity securities	169			3		(27		)	145			658			98		(50		)	706
Total marketable securities and other investments	$	1,396		$	49	$	(37	)	$	1,408		$	1,888		$	138	$	(67	)	$	1,959
Long-term debt including debt due within one year ²	$	(20,582	)	$	—	$	(2,175	)	$	(22,757	)	$	(21,091	)	$	129	$	(1,845	)	$	(22,807	)
Derivatives relating to:
Interest rates	$	—		$	—	$	(4	)	$	(4	)	$	—		$	—	$	(5	)	$	(5	)
Commodities ³	$	—		$	124	$	(277	)	$	(153	)	$	—		$	56	$	(213	)	$	(157	)
Foreign currency	$	—		$	55	$	(132	)	$	(77	)	$	—		$	84	$	(30	)	$	54


1.	U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations.


2.	Cost includes fair value hedge adjustments of $12 million at September 30, 2017 and $18 million at December 31, 2016.


3.	Presented net of cash collateral.

Cost approximates fair value for all other financial instruments.

Investments

The Company’s investments in marketable securities are primarily classified as available-for-sale. The following table provides the investing results from available-for-sale securities for the nine-month periods ended September 30, 2017 and 2016:



Investing Results	Nine Months Ended
In millions	Sep 30, 2017			Sep 30, 2016
Proceeds from sales of available-for-sale securities	$	1,047		$	418
Gross realized gains	$	153		$	34
Gross realized losses	$	(10	)	$	(2	)

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



Contractual Maturities of Debt Securities at Sep 30, 2017	Amortized Cost		Fair Value
In millions	Amortized Cost		Fair Value
Within one year	$	6	$	6
One to five years	321		330
Six to ten years	654		661
After ten years	246		266
Total	$	1,227	$	1,263

At September 30, 2017, the Company had $3,239 million ($3,934 million at December 31, 2016) of held-to-maturity securities (primarily Treasury Bills and Time Deposits) 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 September 30, 2017, the Company had investments in money market funds of $1,457 million classified as cash equivalents ($239 million at December 31, 2016).

The aggregate cost of the Company’s cost method investments totaled $108 million at September 30, 2017 ($120 million at December 31, 2016). Due to the nature of these investments, either the cost basis approximates fair value or fair value is not readily determinable. These investments are reviewed quarterly for impairment indicators. In the second quarter of 2016, a write-down of $4 million was recorded as part of the 2016 restructuring charge. The Company's impairment analysis resulted in no reduction in the cost basis of these investments for the nine-month period ended September 30, 2017 (no reduction, other than the restructuring charge, for the nine-month period ended September 30, 2016).

Repurchase and Reverse Repurchase Agreement Transactions

The Company enters into repurchase and reverse repurchase agreements. These transactions are accounted for as collateralized borrowings and lending transactions bearing a specified rate of interest and are short-term in nature with original maturities of 30 days or less. The underlying collateral is typically Treasury Bills with longer maturities than the repurchase agreement. The impact of these transactions are not material to the Company’s results. There were no repurchase or reverse repurchase agreements outstanding at September 30, 2017 and December 31, 2016.

Subsequent to September 30, 2017, the Company continued to invest excess cash in reverse repurchase agreements. There were $120 million of reverse repurchase agreements outstanding at the time of filing.

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 September 30, 2017. 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.

The notional amounts of the company's derivative instruments were as follows:



Notional Amounts	Sep 30, 2017		Dec 31, 2016
In millions	Sep 30, 2017		Dec 31, 2016
Derivatives designated as hedging instruments:
Interest rate swaps	$	218	$	245
Foreign currency contracts	$	8,510	$	4,053
Derivatives not designated as hedging instruments:
Foreign currency contracts	$	26,139	$	12,388



Commodity Gross Aggregate Notionals	Sep 30, 2017	Dec 31, 2016	Notional Volume Unit
	Sep 30, 2017	Dec 31, 2016	Notional Volume Unit
Derivatives designated as hedging instruments:
Corn	3.3	0.4	million bushels
Crude Oil	4.9	0.6	million barrels
Ethane	10.8	3.6	million barrels
Natural Gas	389.4	78.6	million British thermal units
Propane	5.4	1.5	million barrels
Soybeans	2.1	—	million bushels
Derivatives not designated as hedging instruments:
Ethane	2.9	2.6	million barrels
Gasoline	—	30.0	kilotons
Naptha Price Spread	30.0	50.0	kilotons
Natural Gas	3.8	—	million British thermal units
Propane	2.9	2.7	million barrels

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.

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.

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.

Derivatives Not Designated in Hedging Relationships

Foreign Currency Contracts

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.

Commodity Contracts

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, to reduce exposure to commodity price fluctuations on purchases of raw materials and inventory.

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 income 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 September 30, 2017, with a net loss of $2 million after tax (net loss of $4 million after tax at December 31, 2016).

The Company had open foreign currency-contracts designated as cash flow hedges of the currency risk associated with forecasted feedstock transactions not extending beyond 2018. 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 loss from the foreign currency hedges included in AOCL at September 30, 2017 was $24 million after tax (net gain of $22 million after tax at December 31, 2016).

Commodity swaps, futures and option contracts with maturities of not more than 63 months are utilized and designated as cash flow hedges of forecasted commodity purchases. Current open contracts hedge forecasted transactions until December 2022. 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 September 30, 2017 was $102 million after tax ($99 million after tax loss at December 31, 2016).

Fair Value Hedges

For interest rate swap 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 the first nine months of 2017, the Company entered into and subsequently terminated interest rate swaps designated as fair value hedges of underlying fixed rate debt obligations with maturity dates extending through 2024. The fair value adjustment resulting from these swaps was a gain on the derivatives of $5 million. At September 30, 2017 and December 31, 2016, the Company had no open interest rate swaps designated as fair value hedges of underlying fixed rate debt obligations. Subsequent to September 30, 2017, the Company entered into interest rate swaps with a gross notional US Dollar equivalent of $770 million designated as a fair value hedge 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 at September 30, 2017 and December 31, 2016. In addition, at September 30, 2017, the Company had outstanding foreign-currency denominated debt designated as a hedge of net foreign investment of $178 million ($172 million at December 31, 2016). The results of hedges of the Company’s net investment in foreign operations included in “Cumulative Translation Adjustments” in AOCL was a net loss after-tax of $69 million at September 30, 2017 (net gain after-tax of $1 million at December 31, 2016).

The net after-tax amounts to be reclassified from AOCL to income within the next 12 months are a $2 million loss for interest rate contracts, an $18 million loss for commodity contracts and a $22 million loss for foreign currency contracts.

The following tables provide the fair value and gross balance sheet classification of derivative instruments at September 30, 2017 and December 31, 2016:



Fair Value of Derivative Instruments		Sep 30, 2017
In millions	Balance Sheet Classification ¹	Gross		Counterparty and Cash Collateral Netting			Net Amounts Included in the Consolidated Balance Sheets
Asset derivatives:
Derivatives designated as hedging instruments:
Foreign currency contracts	Other current assets	$	63	$	(57	)	$	6
Commodity contracts	Other current assets	24		(6		)	18
Commodity contracts	Deferred charges and other assets	35		(5		)	30
Total		$	122	$	(68	)	$	54
Derivatives not designated as hedging instruments:
Foreign currency contracts	Other current assets	$	138	$	(89	)	$	49
Commodity contracts	Other current assets	70		(3		)	67
Commodity contracts	Deferred charges and other assets	11		(2		)	9
Total		$	219	$	(94	)	$	125
Total asset derivatives		$	341	$	(162	)	$	179

Liability derivatives:
Derivatives designated as hedging instruments:
Interest rate swaps	Accrued and other current liabilities	$	2	$	—		$	2
Interest rate swaps	Other noncurrent obligations	2		—			2
Foreign currency contracts	Accrued and other current liabilities	129		(57		)	72
Commodity contracts	Accrued and other current liabilities	71		(9		)	62
Commodity contracts	Other noncurrent obligations	157		(6		)	151
Total		$	361	$	(72	)	$	289
Derivatives not designated as hedging instruments:
Foreign currency contracts	Accrued and other current liabilities	$	148	$	(88	)	$	60
Commodity contracts	Accrued and other current liabilities	66		(2		)	64
Commodity contracts	Other noncurrent obligations	2		(2		)	—
Total		$	216	$	(92	)	$	124
Total liability derivatives		$	577	$	(164	)	$	413

1. Updated to conform with current year presentation.



Fair Value of Derivative Instruments		Dec 31, 2016
In millions	Balance Sheet Classification ¹	Gross		Counterparty and Cash Collateral Netting			Net Amounts Included in the Consolidated Balance Sheets
Asset derivatives:
Derivatives designated as hedging instruments:
Foreign currency contracts	Other current assets	$	90	$	(47	)	$	43
Commodity contracts	Other current assets	42		(14		)	28
Commodity contracts	Deferred charges and other assets	10		(3		)	7
Total		$	142	$	(64	)	$	78
Derivatives not designated as hedging instruments:
Foreign currency contracts	Other current assets	$	103	$	(62	)	$	41
Commodity contracts	Other current assets	13		(2		)	11
Commodity contracts	Deferred charges and other assets	12		(2		)	10
Total		$	128	$	(66	)	$	62
Total asset derivatives		$	270	$	(130	)	$	140

Liability derivatives:
Derivatives designated as hedging instruments:
Interest rate swaps	Accrued and other current liabilities	$	3	$	—		$	3
Interest rate swaps	Other noncurrent obligations	2		—			2
Foreign currency contracts	Accrued and other current liabilities	55		(47		)	8
Commodity contracts	Accrued and other current liabilities	32		(14		)	18
Commodity contracts	Other noncurrent obligations	196		(3		)	193
Total		$	288	$	(64	)	$	224
Derivatives not designated as hedging instruments:
Foreign currency contracts	Accrued and other current liabilities	$	84	$	(62	)	$	22
Commodity contracts	Accrued and other current liabilities	4		(2		)	2
Commodity contracts	Other noncurrent obligations	2		(2		)	—
Total		$	90	$	(66	)	$	24
Total liability derivatives		$	378	$	(130	)	$	248

1. Updated to conform to current year presentation.

Assets and liabilities related to forward contracts, interest rate swaps, currency swaps, options and other conditional or exchange contracts executed with the same counterparty under a master netting arrangement are netted. Collateral accounts are netted with corresponding liabilities. The Company posted cash collateral of $6 million at September 30, 2017 (less than $1 million at December 31, 2016).



Effect of Derivative Instruments	Amount of gain (loss) recognized in OCI ¹ (Effective portion)						Amount of gain (loss) recognized in income ^2,3
	Three Months Ended						Three Months Ended
In millions	Sep 30, 2017			Sep 30, 2016			Sep 30, 2017			Sep 30, 2016			Income Statement Classification
Derivatives designated as hedging instruments:
Fair value hedges:
Interest rate swaps	$	—		$	—		$	2		$	—		Interest expense and amortization of debt discount
Cash flow hedges:
Interest rate swaps	1			1			1			1			Interest expense and amortization of debt discount
Foreign currency contracts	(7		)	(1		)	(2		)	(4		)	Cost of sales
Foreign currency contracts	(7		)	—			(5		)	(1		)	Sundry income (expense) - net
Commodity contracts	40			(20		)	(5		)	7			Cost of sales
Net investment hedges:
Foreign currency contracts	(30		)	—			—			—
Total derivatives designated as hedging instruments	$	(3	)	$	(20	)	$	(9	)	$	3
Derivatives not designated as hedging instruments:
Foreign currency contracts	$	—		$	—		$	(118	)	$	(21	)	Sundry income (expense) - net
Commodity contracts	—			—			19			(4		)	Cost of sales
Total derivatives not designated as hedging instruments	$	—		$	—		$	(99	)	$	(25	)
Total derivatives	$	(3	)	$	(20	)	$	(108	)	$	(22	)



Effect of Derivative Instruments	Amount of gain (loss) recognized in OCI ¹ (Effective portion)						Amount of gain (loss) recognized in income ^2,3
	Nine Months Ended						Nine Months Ended
In millions	Sep 30, 2017			Sep 30, 2016			Sep 30, 2017			Sep 30, 2016			Income Statement Classification
Derivatives designated as hedging instruments:
Fair value hedges:
Interest rate swaps	$	—		$	—		$	5		$	—		Interest expense and amortization of debt discount
Cash flow hedges:
Interest rate swaps	5			1			3			3			Interest expense and amortization of debt discount
Foreign currency contracts	(27		)	(11		)	13			(3		)	Cost of sales
Foreign currency contracts	(21		)	—			(14		)	—			Sundry income (expense) - net
Commodity contracts	—			7			(1		)	(32		)	Cost of sales
Net investment hedges:
Foreign currency contracts	(65		)	—			—			—
Total derivatives designated as hedging instruments	$	(108	)	$	(3	)	$	6		$	(32	)
Derivatives not designated as hedging instruments:
Foreign currency contracts	$	—		$	—		$	(277	)	$	(53	)	Sundry income (expense) - net
Commodity contracts	—			—			5			(12		)	Cost of sales
Total derivatives not designated as hedging instruments	$	—		$	—		$	(272	)	$	(65	)
Total derivatives	$	(108	)	$	(3	)	$	(266	)	$	(97	)

1. OCI is defined as other comprehensive income (loss).

2. For cash flow hedges, this represents the effective portion of the gain (loss) reclassified from AOCL into income during the period. For the three- and nine-month periods ended September 30, 2017 and 2016, there was no material ineffectiveness with regard to the Company's cash flow hedges.

3. Pretax amounts.