This excerpt taken from the HMC 20-F filed Jun 30, 2009.
Foreign exchange and interest rate instruments (see notes 1(q) and 15)
The fair values of foreign currency forward exchange contracts and foreign currency option contracts are estimated using market observable inputs such as spot exchange rates, discount rates and implied volatility. Fair value measurement for foreign currency forward exchange contracts and foreign currency option contracts are
HONDA MOTOR CO., LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements(Continued)
classified as Level 2. The fair values of currency swap agreements and interest rate swap agreements are estimated by discounting future cash flows using market observable inputs such as LIBOR rates, swap rates, and foreign exchange rates. Fair value measurement for these currency swap agreements and interest rate swap agreements are classified as Level 2.
The fair values of a limited number of interest rate swap agreements related to certain off balance sheet securitizations are estimated using significant assumptions including market observable inputs, as well as internally developed prepayment assumptions as an input into the model, in order to forecast future notional amounts on these structured derivative contracts. Accordingly, fair value measurement for these derivative contracts is classified as Level 3.
The credit risk of Honda and its counterparties are considered on the valuation of foreign exchange and interest rate instruments.