Note 12. Derivatives and Hedging Activities

The Company carries out transactions involving foreign currency exchange derivative financial instruments. The transactions are designed to hedge the Company’s exposure in currencies other than the U.S. dollar. The Company is primarily exposed to foreign exchange risk with respect to recognized assets and liabilities and forecasted transactions denominated in the New Israeli Shekel (“NIS”), the Euro and the Japanese Yen. Gains and losses on the hedging instruments offset losses and gains on the hedged items.

The following table summarizes the consolidated balance sheets classification and fair values of the Company’s derivative instruments:

As of December 31, 2018, the notional amounts of the Company’s outstanding exchange forward contracts, not designated as hedging instruments, were $89.1 million and were used to reduce foreign currency exposures of the Euro, New Israeli Shekel (the “NIS”), Japanese Yen, Korean Won and Chinese Yuan. With respect to such derivatives, gain of $2.0 million and loss of $5.0 million were recognized under financial income, net for the years ended December 31, 2018 and 2017, respectively. Such gains and losses partially offset the revaluation losses of the balance sheet items, which are also recognized under financial income, net.

As of December 31, 2018 and 2017, the Company had in effect foreign exchange forward contracts for the conversion of $41.3 million and $13.2 million, respectively, into NIS. These foreign exchange forward contracts were designated as cash flow hedge for accounting purposes. The Company uses short-term cash flow hedge contracts to reduce its exposure to variability in expected future cash flows resulting mainly from payroll costs denominated in New Israeli Shekels. The changes in fair value of those contracts are included in the Company’s accumulated other comprehensive loss. These contracts mature through December, 2019.