Note 16 – Fair Value (continued) FINaNcIal INsTRuMENTs NOTE 17 – dErIvATIvE INsTruMENTs ANd HEdgINg ACTIvITIEs cash FlOw hEDGING sTRaTEGy FaIRValuE hEDGING sTRaTEGy The Company’s financial instruments consist primarily of cash and cash equivalents, short-term investments, accounts receivable, net,  accounts payable, trade, short-term borrowings and long-term debt. Due to their short-term nature, the carrying value of cash and cash  equivalents, short-term investments, accounts receivable, net, accounts payable, trade and short-term borrowings are a reasonable  estimate of their fair value. The fair value of the Company’s long-term fixed-rate debt, based on quoted market prices, was $480.7 million  and $468.7 million at December 31, 2011 and 2010, respectively. The carrying value of this debt was $428.9 million and $430.4 million  at December 31, 2011 and 2010, respectively. The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative  instruments are commodity price risk, foreign currency exchange rate risk and interest rate risk. Forward contracts on various  commodities are entered into in order to manage the price risk associated with forecasted purchases of natural gas used in the  Company’s manufacturing process. Forward contracts on various foreign currencies are entered into in order to manage the foreign  currency exchange rate risk on forecasted revenue denominated in foreign currencies. Other forward exchange contracts on various  foreign currencies are entered into in order to manage the foreign currency exchange rate risk associated with certain of the Company’s  commitments denominated in foreign currencies. Interest rate swaps are entered into to manage interest rate risk associated with the  Company’s fixed and floating-rate borrowings. The Company designates certain foreign currency forward contracts as cash flow hedges of forecasted revenues and certain interest  rate hedges as fair value hedges of fixed-rate borrowings. The majority of the Company’s natural gas forward contracts are not subject  to any hedge designation as they are considered within the normal purchases exemption. The Company does not purchase or hold any derivative financial instruments for trading purposes. As of December 31, 2011 and 2010,  the Company had $145.2 million and $199.6 million, respectively, of outstanding foreign currency forward contracts at notional value.  Refer to Note 16 – Fair Value for the fair value disclosure of derivative financial instruments. For certain derivative instruments that are designated as and qualify as cash flow hedges (i.e., hedging the exposure to variability in  expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument  is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the  forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The remaining gain or  loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any  (i.e., the ineffective portion), or hedge components excluded from the assessment of effectiveness, are recognized in the Consolidated  Statement of Income during the current period. To protect against a reduction in the value of forecasted foreign currency cash flows resulting from export sales over the next year,  the Company has instituted a foreign currency cash flow hedging program. The Company hedges portions of its forecasted intra-group  revenue or expense denominated in foreign currencies with forward contracts. When the dollar strengthens significantly against foreign  currencies, the decline in the present value of future foreign currency revenue is offset by gains in the fair value of the forward contracts  designated as hedges. Conversely, when the dollar weakens, the increase in the present value of future foreign currency cash flows is  offset by losses in the fair value of the forward contracts.  For derivative instruments that are designated and qualify as fair value hedges (i.e., hedging the exposure to changes in the fair value of  an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument  as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in the same line item associated  with the hedged item (i.e., in “interest expense” when the hedged item is fixed-rate debt). 83 THE TIMKEN COMPANY FINANCIAls ANd FOOTNOTEs