This excerpt taken from the LFL 20-F filed Jun 25, 2009.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:
As of December 31, 2008, the Company held certain items that are required to be measured at fair value on a recurring basis. These included:
The following table provides information by level for assets and liabilities that are measured at fair value, as defined by SFAS 157, on a recurring basis:
Investments in short term mutual funds are valued using publicly available year end quotes, therefore, they have been classified as Level I.
Bonds are investments in corporate bonds for which the fair value is determined using the market quotes. Due to this, we classified these investments as Level 1 under SFAS 157.
Interest rate derivative are related to the Companys attempts to hedge LIBOR exposure. These contracts consist mainly of OTC transactions such as long term interest rate swaps, forward starting swaps and interest rate call options. All of them are contracted with high rating US counterparties.
Fuel derivative contracts are related to the Companys attempts to hedge fuel costs and are denominated in WTI which has a high correlation (more than 95%) with the monthly average price of Jet Fuel paid by the Company to different suppliers.
Foreign Exchange Swaps are mainly related to the attempt to have a synthetic US dollar denominated deposit or Chilean Central Bank Obligation which are denominated in Chilean peso.
The fair value of WTI options are traded on US national exchanges and, therefore, have readily available public quotes. Because of this, they have been classified as Level I.
Fair values of all other derivative instruments and options are determined using either pricing valuation models that utilize market observable inputs or broker quotes. The valuation models consider projected discounted cash flows, relevant swap curves and appropriate implied volatilities. Taking that into consideration, we classified these derivatives as Level 2 under SFAS 157.