Financial instruments include cash and cash equivalents, short-term investments, cash held in escrow, marketable equity securities, accounts receivable, company-owned life insurance, accounts payable, short-term and long-term debt instruments, and derivatives. The fair values of these financial instruments approximated their carrying values at June 30, 2019 and December 31, 2018, in the aggregate, except for long-term debt instruments.

The Company has exposure to market risk from changes in foreign currency exchange rates and interest rates. As a result, financial instruments, including derivatives, have been used to hedge these underlying economic exposures. Certain of these instruments qualify as fair value, cash flow, and net investment hedges upon meeting the requisite criteria, including effectiveness of offsetting hedged or underlying exposures. Changes in the fair value of derivatives that do not qualify for hedge accounting are recognized in Income before income taxes in the period incurred.

PPG’s policies do not permit speculative use of derivative financial instruments. PPG enters into derivative financial instruments with high credit quality counterparties and diversifies its positions among such counterparties in order to reduce its exposure to credit losses. The Company did not realize a credit loss on derivatives during the three and six month periods ended June 30, 2019 and 2018.

All of PPG's outstanding derivative instruments are subject to accelerated settlement in the event of PPG’s failure to meet its debt or payment obligations under the terms of the instruments’ contractual provisions. In addition, if the Company would be acquired and its payment obligations under its derivative instruments’ contractual arrangements are not assumed by the acquirer, or if PPG would enter into bankruptcy, receivership or reorganization proceedings, its outstanding derivative instruments would also be subject to accelerated settlement.

There were no derivative instruments de-designated or discontinued as hedging instruments during the three and six month periods ended June 30, 2019 and 2018 and there were no gains or losses deferred in Accumulated other comprehensive loss on the condensed consolidated balance sheet that were reclassified to Income before income taxes in the condensed consolidated income statement in the six month periods ended June 30, 2019 and 2018 related to hedges of anticipated transactions that were no longer expected to occur.

The Company uses interest rate swaps from time to time to manage it’s exposure to changing interest rates. When outstanding, the interest rate swaps are typically designated as fair value hedges of certain outstanding debt obligations of the Company and are recorded at fair value.

In February of 2018, PPG entered into interest rate swaps which converted $525 million of fixed rate debt to variable rate debt. The swaps are designated as fair value hedges and are carried at fair value. Changes in the fair value of these swaps and changes in the fair value of the related debt are recorded in Interest expense in the accompanying condensed consolidated statement of income.

PPG designates certain foreign currency forward contracts as cash flow hedges of the Company’s exposure to variability in exchange rates on third party transactions denominated in foreign currencies. Underlying notional amounts related to these foreign currency forward contracts were $71 million at June 30, 2019 and $50 million at December 31, 2018, respectively.

PPG uses cross currency swaps and foreign currency euro-denominated debt to hedge a significant portion of its net investment in its European operations, as follows:

In February 2018, PPG entered into U.S. dollar to euro cross currency swap contracts with a total notional amount of $575 million and designated these contracts as hedges of the Company's net investment in its European operations. During the term of these contracts, PPG will receive payments in U.S. dollars and make payments in euros to the counterparties. Also in February 2018, the Company settled outstanding U.S. dollar to euro cross currency swap contracts with a total notional amount of $560 million.

As of June 30, 2019 and December 31, 2018, PPG had designated €2.3 billion of euro-denominated borrowings as hedges of a portion of its net investment in the Company's European operations. The carrying value of these instruments as of June 30, 2019 and December 31, 2018 was $2.6 billion for both periods.

PPG uses foreign currency forward contracts to manage net transaction exposures that do not qualify for hedge accounting; therefore, the change in the fair value of these instruments is recorded in Other charges in the condensed consolidated statement of income in the period of change. Underlying notional amounts related to these foreign currency forward contracts were $2.7 billion and $2.5 billion at June 30, 2019 and December 31, 2018, respectively.

As of June 30, 2019, the Company had accumulated pre-tax unrealized translation gains in Accumulated other comprehensive loss on the condensed consolidated balance sheet related to the euro-denominated borrowings, foreign currency forward contracts and the cross currency swaps of $188 million. As of December 31, 2018, the Company had accumulated pre-tax unrealized translation gains of $161 million.

The following table summarizes the location within the condensed consolidated financial statements and amount of gains (losses) related to derivative financial instruments activity for the six months ended June 30, 2019 and 2018. All dollar amounts are shown on a pre-tax basis.



	June 30, 2019						June 30, 2018
($ in millions)	(Loss)/ Gain Deferred in OCI			Gain/(Loss) Recognized			(Loss)/Gain Deferred in OCI			Gain/(Loss) Recognized			Caption In Condensed Consolidated Statement of Income
Economic
Foreign currency forward contracts		$—			$32			$—			$23		Other charges
Fair Value
Interest rate swaps	—			1			—			2			Interest expense
Cash Flow
Foreign currency forward contracts⁽¹⁾	(3		)	(4		)	(3		)	(3		)	Other charges and Cost of sales
Total Cash Flow		($3	)		$29			($3	)		$22
Net Investment
Cross currency swaps		$6			$8			$5			$5		Interest expense
Foreign denominated debt	22			—			74			—
Total Net Investment		$28			$8			$79			$5

The Company follows a fair value measurement hierarchy to measure its assets and liabilities. As of June 30, 2019 and December 31, 2018, the assets and liabilities measured at fair value on a recurring basis were cash equivalents, equity securities and derivatives. In addition, the Company measures its pension plan assets at fair value (see Note 13, "Employee Benefit Plans" under Item 8 in the 2018 Form 10-K for further details). The Company's financial assets and liabilities are measured using inputs from the following three levels:

Level 1 inputs are quoted prices in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date. Level 1 inputs are considered to be the most reliable evidence of fair value as they are based on unadjusted quoted market prices from various financial information service providers and securities exchanges.

Level 2 inputs are directly or indirectly observable prices that are not quoted on active exchanges, which include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means. The fair values of the derivative instruments reflect the instruments' contractual terms, including the period to maturity, and uses observable market-based inputs, including forward curves.

Level 3 inputs are unobservable inputs employed for measuring the fair value of assets or liabilities. The Company does not have any recurring financial assets or liabilities that are recorded in its consolidated balance sheets as of June 30, 2019 and December 31, 2018 that are classified as Level 3 inputs.



	June 30, 2019						December 31, 2018
($ in millions)	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets:
Other current assets:
Marketable equity securities		$4		$—		$—		$4		$—		$—
Foreign currency forward contracts^(a)	—		19		—		—		45		—
Investments:
Marketable equity securities	78		—		—		69		—		—
Other assets:
Cross currency swaps^(b)	—		41		—		—		35		—
Interest rate swaps ^(c)	—		35		—		—		8		—
Liabilities:
Accounts payable and accrued liabilities:
Foreign currency forward contracts ^(d)	—		—		—		—		1		—
Foreign currency forward contracts^(a)	—		10		—		—		9		—



($ in millions)	June 30, 2019 ^(a)		December 31, 2018 ^(b)
Long-term debt - carrying value		$5,478		$5,000
Long-term debt - fair value		$5,666		$5,101

The fair values of the debt instruments were based on discounted cash flows and interest rates then currently available to the Company for instruments of the same remaining maturities and were measured using level 2 inputs.