Sprint - Nextel 2010 Annual Report Download - page 117
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in the pricing models where quoted market prices from securities and derivatives exchanges are available and reliable.
We also use certain unobservable inputs that cannot be validated by reference to a readily observable market or exchange data
and rely, to a certain extent, on management’s own assumptions about the assumptions that market participants would use in
pricing the security. We use many factors that are necessary to estimate market values, including interest rates, market risks,
market spreads, timing of contractual cash flows, market liquidity, review of underlying collateral and principal, interest and
dividend payments.
Derivatives
Derivatives are classified in Level 3 of the valuation hierarchy. To estimate the fair value, we use an income approach
based on valuation models, including option pricing models and discounted cash flow models. We maximize the use of market-
based observable inputs in the models and develop our own assumptions for unobservable inputs based on management
estimates of market participants’ assumptions in pricing the instruments.
We use a trinomial option pricing model to estimate the fair value of the Exchange Options. The inputs include the
contractual terms of the instrument and market-based parameters such as interest rate forward curves, stock price and dividend
yield. A level of subjectivity is applied to estimate our stock price volatility. The stock price volatility is based on our historical
stock price volatility giving consideration to our estimates of market participant adjustments for general market conditions as
well as company-specific factors such as market trading volume and our expected future performance.
The following table summarizes our financial assets and liabilities by level within the valuation hierarchy at
December 31, 2010 (in thousands):
Financial assets:
Cash and cash equivalents
Short-term investments
Long-term investments
Other assets — derivative assets
Financial liabilities:
Other current liabilities — derivative liabilities
Quoted
Prices in
Active
Markets
(Level 1)
$ 1,233,562
$ 502,316
$ —
$ —
$ —
Significant
Other
Observable
Inputs
(Level 2)
$ —
$ —
$ —
$ —
$ —
Significant
Unobservable
Inputs
(Level 3)
$ —
$ —
$ 15,251
$ 292
$(167,892)
Total
Fair Value
$ 1,233,562
$ 502,316
$ 15,251
$ 292
$(167,892)
The following table summarizes our financial assets and liabilities by level within the valuation hierarchy at
December 31, 2009 (in thousands):
Financial assets:
Cash and cash equivalents
Short-term investments
Long-term investments
Quoted
Prices in
Active
Markets
(Level 1)
$ 1,698,017
$ 2,106,661
$ 74,516
Significant
Other
Observable
Inputs
(Level 2)
$ —
$ —
$ —
Significant
Unobservable
Inputs
(Level 3)
$ —
$ —
$ 13,171
Total
Fair Value
$ 1,698,017
$ 2,106,661
$ 87,687
Table of Contents CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(CONTINUED)
F-60