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8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

ÌýÌýÌýÌýÌýÌýÌýÌýWe are exposed to market risks, such as changes in interest rates, foreign exchange rates and commodity pricing risks. From time to time, we enter into transactions, including transactions involving derivative instruments, to manage certain of these exposures.

ÌýÌýÌýÌýÌýÌýÌýÌýAll derivatives, whether designated in hedging relationships or not, are recorded on our balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and the hedged items are recognized in earnings. If the derivative is designated as a cash flow hedge, changes in the fair value of the derivative are recorded in accumulated other comprehensive loss, to the extent effective, and will be recognized in the income statement when the hedged item affects earnings. To the extent applicable, we perform effectiveness assessments in order to use hedge accounting at each reporting period. For a derivative that does not qualify as a hedge, changes in fair value are recognized in earnings.

ÌýÌýÌýÌýÌýÌýÌýÌýWe also hedge our net investment in certain European operations. Changes in the fair value of the hedge in the net investment of certain European operations are recorded in accumulated other comprehensive loss.

ÌýÌýÌýÌýÌýÌýÌýÌýOur cash flows and earnings are subject to fluctuations due to exchange rate variation. Our revenues and expenses are denominated in various foreign currencies. From time to time, we may enter into foreign currency derivative instruments to minimize the short-term impact of movements in foreign currency rates. Where practicable, we generally net multicurrency cash balances among our subsidiaries to help reduce exposure to foreign currency exchange rates. Certain other exposures may be managed from time to time through financial market transactions, principally through the purchase of spot or forward foreign exchange contracts (generally with maturities of one year or less). We do not hedge our foreign currency exposures in a manner that would eliminate the effect of changes in exchange rates on our cash flows and earnings. As of SeptemberÌý30, 2014, we had approximately $175Ìýmillion in notional amount (in U.S. dollar equivalents) outstanding in forward foreign currency contracts.

ÌýÌýÌýÌýÌýÌýÌýÌýOn DecemberÌý9, 2009, we entered into a five-year interest rate contract to hedge the variability caused by monthly changes in cash flow due to associated changes in LIBOR under our Senior Credit Facilities. The notional value of the contract is $50Ìýmillion, and it has been designated as a cash flow hedge. The effective portion of the changes in the fair value of the swap was recorded in other comprehensive loss. We will pay a fixed 2.6% on the hedge and receive the one-month LIBOR rate. As of SeptemberÌý30, 2014, the fair value of the hedge was less than $1Ìýmillion and was recorded in current liabilities on our condensed consolidated balance sheets (unaudited).

ÌýÌýÌýÌýÌýÌýÌýÌýOn JanuaryÌý19, 2010, we entered into an additional five-year interest rate contract to hedge the variability caused by monthly changes in cash flow due to associated changes in LIBOR under our Senior Credit Facilities. The notional value of the contract is $50Ìýmillion, and it has been designated as a cash flow hedge. The effective portion of the changes in the fair value of the swap was recorded as other comprehensive loss. We will pay a fixed 2.8% on the hedge and receive the one-month LIBOR rate. As of SeptemberÌý30, 2014, the fair value of the hedge was less than $1million and was recorded in current liabilities on our condensed consolidated balance sheets (unaudited).

ÌýÌýÌýÌýÌýÌýÌýÌýOn SeptemberÌý1, 2011, we entered into a $50Ìýmillion forward interest rate contract that will begin in December 2014 with maturity in April 2017 and a $50Ìýmillion forward interest rate contract that will begin in January 2015 with maturity in April 2017. These two forward contracts are to hedge the variability caused by monthly changes in cash flow due to associated changes in LIBOR under our Senior Credit Facilities once our existing interest rate hedges mature. These swaps are designated as cash flow hedges and the effective portion of the changes in the fair value of the swaps were recorded in other comprehensive income. Both interest rate contracts will pay a fixed 2.5% on the hedge and receive the one-month LIBOR rate once the contracts begin in 2014 and 2015, respectively. As of SeptemberÌý30, 2014, the combined fair value of these two hedges was $3Ìýmillion and was recorded in other noncurrent liabilities on our condensed consolidated balance sheets (unaudited).

ÌýÌýÌýÌýÌýÌýÌýÌýIn 2009, Sasol-ÀÖÌìÌÃfun88(ÖйúÇø)¹Ù·½ÍøÕ¾ entered into derivative transactions to hedge the variable interest rate associated with its local credit facility. These derivative rate hedges include a floating to fixed interest rate contract providing Sasol-ÀÖÌìÌÃfun88(ÖйúÇø)¹Ù·½ÍøÕ¾ with EURIBOR interest payments for a fixed payment of 3.62% and a cap for future periods with a strike price of 3.62%. In connection with the consolidation of Sasol-ÀÖÌìÌÃfun88(ÖйúÇø)¹Ù·½ÍøÕ¾ as of AprilÌý1, 2011, the interest rate contract is now included in our consolidated results. See "NoteÌý5. Variable Interest Entities." The notional amount of the fixed rate contracts as of SeptemberÌý30, 2014 was â‚�12Ìýmillion (approximately $15Ìýmillion) and the notional amount of caps as of SeptemberÌý30, 2014 was â‚�22Ìýmillion (approximately $28Ìýmillion) and the derivative transactions do not qualify for hedge accounting. As of SeptemberÌý30, 2014, the fair value of the hedges was less than â‚�1Ìýmillion (less than approximately $1Ìýmillion) and was recorded in other noncurrent liabilities on our condensed consolidated balance sheets (unaudited). For the three and nine months ended SeptemberÌý30, 2014, we recorded a reduction of interest expense of nil and â‚�1Ìýmillion (approximately nil and $1Ìýmillion), respectively, due to changes in the fair value of the hedges.

ÌýÌýÌýÌýÌýÌýÌýÌýBeginning in 2009, Arabian Amines Company entered into a 12-year floating to fixed interest rate contract providing for a receipt of LIBOR interest payments for a fixed payment of 5.02%. In connection with the consolidation of Arabian Amines Company as of JulyÌý1, 2010, the interest rate contract is now included in our consolidated results. See "NoteÌý5. Variable Interest Entities." The notional amount of the swap as of SeptemberÌý30, 2014 was $28Ìýmillion, and the interest rate contract is not designated as a cash flow hedge. As of SeptemberÌý30, 2014, the fair value of the swap was $3Ìýmillion and was recorded in current liabilities on our condensed consolidated balance sheets (unaudited). For the three and nine months ended SeptemberÌý30, 2014, we recorded additional (reduction of) interest expense of nil and ($1) million, respectively, due to changes in fair value of the swap. As of SeptemberÌý30, 2014, Arabian Amines Company was not in compliance with certain financial covenants under its loan commitments. For more information, see "NoteÌý7. Debt—Direct and Subsidiary Debt—Variable Interest Entity Debt."

ÌýÌýÌýÌýÌýÌýÌýÌýIn conjunction with the issuance of our 8.625% senior subordinated notes due 2020, we entered into cross-currency interest rate contracts with three counterparties. On MarchÌý17, 2010, we made payments of $350Ìýmillion to these counterparties and received â‚�255Ìýmillion from these counterparties, and on maturity (MarchÌý15, 2015) we are required to pay â‚�255Ìýmillion to these counterparties and will receive $350Ìýmillion from these counterparties. On MarchÌý15 and SeptemberÌý15 of each year, we will receive U.S. dollar interest payments of approximately $15Ìýmillion (equivalent to an annual rate of 8.625%) and make interest payments of approximately â‚�11Ìýmillion (equivalent to an annual rate of approximately 8.41%). This swap is designated as a hedge of net investment for financial reporting purposes. As of SeptemberÌý30, 2014, the fair value of this swap was $30Ìýmillion and was recorded in current assets on our condensed consolidated balance sheets (unaudited).

ÌýÌýÌýÌýÌýÌýÌýÌýWe finance certain of our non-U.S. subsidiaries with intercompany loans that are, in many cases, denominated in currencies other than the entities' functional currency. We manage the net foreign currency exposure created by this debt through various means, including cross-currency swaps, the designation of certain intercompany loans as permanent loans because they are not expected to be repaid in the foreseeable future and the designation of certain debt and swaps as net investment hedges.

ÌýÌýÌýÌýÌýÌýÌýÌýForeign currency transaction gains and losses on intercompany loans that are not designated as permanent loans are recorded in earnings. Foreign currency transaction gains and losses on intercompany loans that are designated as permanent loans are recorded in other comprehensive income. From time to time, we review such designation of intercompany loans.

ÌýÌýÌýÌýÌýÌýÌýÌýWe review our non-U.S. dollar denominated debt and derivative instruments to determine the appropriate amounts designated as hedges. As of SeptemberÌý30, 2014, we have designated approximately â‚�575Ìýmillion (approximately $731Ìýmillion) of euro-denominated debt and cross-currency interest rate contracts as a hedge of our net investment. For the three and nine months ended SeptemberÌý30, 2014, the amount of gain recognized on the hedge of our net investment was $56Ìýmillion and $62Ìýmillion, respectively, and was recorded in other comprehensive income on our condensed consolidated statements of comprehensive income (unaudited). As of SeptemberÌý30, 2014, we had approximately â‚�967Ìýmillion (approximately $1,229Ìýmillion) in net euro assets.