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Table of Contents
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following is a description of the valuation methodologies and pricing assumptions we used for financial instruments measured and recorded
at fair value on a recurring basis in our financial statements and the classification of such instruments pursuant to the valuation hierarchy.
Cash Equivalents and Investments
Where quoted prices for identical securities are available in an active market, we use quoted market prices to determine the fair value of
investment securities and cash equivalents, and they are classified in Level 1 of the valuation hierarchy. Level 1 securities include U.S. Government
Treasury Bills, actively traded U.S. Government Treasury Notes and money market mutual funds for which there are quoted prices in active markets or
quoted net asset values published by the money market mutual fund and supported in an active market.
Investments are classified in Level 2 of the valuation hierarchy for securities where quoted prices are available for similar investments in active
markets or for identical or similar investments in markets that are not active and we use "consensus pricing" from independent external valuation
sources. Level 2 securities include U.S. Government Agency Discount Notes and U.S. Government Agency Notes.
Derivatives
The Exchange Options are classified in Level 3 of the valuation hierarchy. To estimate the fair value of the Exchange Options, 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 input. The stock price volatility used in computing fair value of the Exchange Options at December 31, 2012 of 25% 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. Holding all other pricing assumption constant,
an increase or decrease of 10% in our estimated stock volatility at December 31, 2012 could result in a loss of $13.3 million, or a gain of $5.3 million,
respectively.
The following table summarizes our financial assets and liabilities by level within the valuation hierarchy at December 31, 2012 (in thousands):
F - 69
12.
Fair Value
Quoted
Prices in
Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Fair Value
Financial assets:
Cash and cash equivalents
$
193,455
$
—
$
—
$
193,455
Short - term investments
$
375,743
$
299,369
$
—
$
675,112
Other assets — derivative warrant assets
$
—
$
—
$
211
$
211
Financial liabilities:
Other current liabilities — derivative liabilities (Exchange Options)
$
—
$
—
$
( 5,333
)
$
(5,333
)