Spirit Airlines 2012 Annual Report Download - page 84

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Notes to Financial Statements—(Continued)
Cash and cash equivalents at December 31, 2012 and December 31, 2011 are comprised of liquid money market funds and cash. The Company maintains cash with
various high-quality financial institutions. The Company had no transfers of assets or liabilities between any of the above levels during the years ended December 31, 2012
and 2011 .
The Company did not elect hedge accounting on any of the derivative instruments, and as a result, changes in the fair values of these fuel hedge contracts are recorded
each period in fuel expense. Fair values of the instruments are determined using standard option valuation models. The Company also considers counterparty risk and its
own credit risk in its determination of all estimated fair values. The Company offsets fair value amounts recognized for derivative instruments executed with the same
counterparty under a master netting arrangement. The Company determines the fair value of fuel derivative option contracts utilizing an option pricing model based on
inputs that are either readily available in public markets or can be derived from information available in publicly quoted markets. The Company has consistently applied
these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it holds.
Due to the fact that certain inputs utilized to determine the fair value of aircraft fuel derivatives are unobservable (principally implied volatility), the Company has
categorized these derivatives as Level 3. Implied volatility of an option contract is the volatility of the price of the underlying that is implied by the market price of the
option based on an option pricing model. Thus, it is the volatility that, when used in a particular pricing model, yields a theoretical value for the option equal to the current
market price of that option. Implied volatility, a forward-looking measure, differs from historical volatility because the latter is calculated from known past returns. At each
balance sheet date, the Company substantiates and adjusts unobservable inputs. The Company routinely assesses the valuation model's sensitivity to changes in implied
volatility. Based on the Company's assessment of the valuation model's sensitivity to changes in implied volatility, it noted that holding other inputs constant, a significant
increase (decrease) in implied volatility would result in a significantly higher (lower) determination of fair value measurement for the Company's aircraft fuel derivatives.
The Company's Valuation Group is made up of individuals from the Company's Risk Management, Treasury and Corporate Accounting departments. The Valuation
Group is responsible for the Company's valuation policies, procedures and execution thereof. The Company's Valuation Group reports to the Company's Chief Financial
Officer and Audit Committee who approve all derivative transactions. The Valuation Group compares the results of the Company's internally developed valuation methods
with counterparty reports at each balance sheet date and assesses the Company's valuation methods for accurateness and identifies any needs for modification.
83
Fair Value Measurements as of December 31, 2011
Total
Level
1
Level
2
Level
3
(in millions)
Cash and cash equivalents
$
343.3
$
343.3
$
—
$
—
Option contracts
1.0
—
—
1.0
Total assets
$
344.3
$
343.3
$
—
$
1.0
Option contracts
0.7
$
—
$
—
$
0.7
Total liabilities
$
0.7
$
—
$
—
$
0.7