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70
fair value measurement inputs into the following three
classifications:
Level 1: Quoted market prices in active markets for
identical assets or liabilities.
Level 2: Observable market-based inputs other than
quoted prices included within Level 1 that are
observable for the asset or liability, either directly or
indirectly.
Level 3: Unobservable inputs for the asset or liability
reflecting the reporting entity’s own assumptions or
external inputs from inactive markets.
Transfers between levels are recognized at the end of
the reporting period. All of International Paper’s
derivative fair value measurements use Level 2 inputs.
Below is a description of the valuation calculation and
the inputs used for each class of contract:
Interest Rate Contracts
Interest rate contracts are valued using swap curves
obtained from an independent market data provider.
The market value of each contract is the sum of the fair
value of all future interest payments between the
contract counterparties, discounted to present value.
The fair value of the future interest payments is
determined by comparing the contract rate to the
derived forward interest rate and present valued using
the appropriate derived interest rate curve.
Foreign Exchange Contracts
Foreign currency forward contracts are valued using
foreign currency forward and interest rate curves
obtained from an independent market data provider.
The fair value of each contract is determined by
comparing the contract rate to the forward rate. The fair
value is present valued using the applicable interest
rate from an independent market data provider.
Electricity Contract
The electricity contract is valued using the Mid-C
index forward curved obtained from the
Intercontinental Exchange. The market value of the
contract is the sum of the fair value of all future
purchase payments between the contract
counterparties, discounted to present value. The fair
value of the future purchase payments is determined
by comparing the contract price to the forward price
and present valued using International Paper's cost
of capital.
Embedded Derivative
Embedded derivatives are valued using a hypothetical
interest rate derivative with identical terms. The
hypothetical interest rate derivative contracts are fair
valued as described above under Interest Rate
Contracts.
Since the volume and level of activity of the markets
that each of the above contracts are traded in has been
normal, the fair value calculations have not been
adjusted for inactive markets or disorderly transactions.
The following table provides a summary of the impact of our derivative instruments in the consolidated balance sheet:
Fair Value Measurements
Level 2 – Significant Other Observable Inputs
Assets Liabilities
In millions
December 31,
2015
December 31,
2014
December 31,
2015
December 31,
2014
Derivatives designated as hedging instruments
Foreign exchange contracts – cash flow $5(a) $16(b)$ 1 (c) $ 14 (c)
Total derivatives designated as hedging
instruments $5 $16 $1 $14
Derivatives not designated as hedging instruments
Electricity contract $—$—$ 7 (d) $2(c)
Foreign exchange contracts —1(a) —2(c)
Total derivatives not designated as hedging
instruments $— $1 $7 $4
Total derivatives $5 $17 $8 $18
(a) Included in Other current assets in the accompanying consolidated balance sheet.