Virgin Media 2012 Annual Report Download - page 94

F-23
Valuation of conversion hedges:
Because the conversion hedges do not qualify for equity classification, the fair values have been included as a non-
current derivative financial asset in the consolidated balance sheets. The conversion hedges may only be exercised
by us upon maturity of the convertible notes. As of December 31, 2012, the fair value of these instruments was estimated
to be £302.4 million, using the Black-Scholes Merton valuation technique. The fair values of the conversion hedges
are primarily impacted by the price of our stock on the measurement date, but are also impacted by the remaining
duration of the options, the strike price ($19.22 per share) of the instrument, the expected volatility of our stock, the
cap price ($35.00 per share) of the instrument, the dividend yield on our stock, exchange rates, and counterparty non-
performance risk. The table below presents the estimated impact on the December 31, 2012 fair value of a hypothetical
20% increase and decrease in our stock price, holding all other inputs constant (in millions):
December 31,
2012
Estimated fair value of conversion hedges as reported £ 302.4
Estimated fair value of conversion hedges assuming a 20% increase in our stock price £ 339.4
Estimated fair value of conversion hedges assuming a 20% decrease in our stock price £ 237.9
We have determined that the overall valuation of the conversion hedges falls within level 3 of the fair value hierarchy
as the assumption for the expected volatility of our stock price over the term of the options is based on an unobservable
input and is deemed to be significant to the determination of fair value. Other impacts are not significant or are observable.
We utilized expected volatility assumptions of 24% and 32% in the valuation of each component of the conversion
hedges as of December 31, 2012. An increase in this input in isolation would generally result in a lower value of the
conversion hedges whilst a decrease in this input would result in a higher value of the conversion hedges. Non-
performance risk is based on quoted credit default swaps for each of the four counterparties to the contracts. The
inclusion of counterparty non-performance risk resulted in a decrease to the fair values of the conversion hedges of
£13.7 million and £25.0 million as of December 31, 2012 and December 31, 2011, respectively.
The following table presents a reconciliation of the beginning and ending balances of the conversion hedges (in millions):
2012 2011
Balance at January 1 £ 138.2 £191.9
Unrealized gain (loss) included in gain (loss) on derivative instruments 173.3 (52.6)
Unrealized currency translation adjustment included in other comprehensive income (9.1)(1.1)
Balance at December 31 £ 302.4 £138.2
Future changes in fair values of the conversion hedges will be reported as gains (losses) on derivative instruments in
the consolidated statements of comprehensive income.
Long term debt:
The carrying value of our senior credit facility approximates its fair value and is excluded from the table below. The fair
values of our senior notes, convertible notes and senior secured notes in the table below are based on the market
prices in active markets which incorporate non-performance risk. As such, these measurements are classified within
level 1 in the fair value hierarchy.
The carrying values of the $500 million 5.25% and £650 million 5.50% senior secured notes due 2021 include increases
of £42.9 million and £109.1 million, respectively, at December 31, 2012, and increases of £45.7 million and £77.9
million, respectively, at December 31, 2011, as a result of our application of fair value hedge accounting to these
instruments.
Table of Contents
VIRGIN MEDIA INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 7—Fair Value Measurements (continued)