CIENA CORP - 10-K filing on 2012-12-21

Fair Value Measurements

12 Months Ended

Oct. 31, 2012

As of the date indicated, the following table summarizes the fair value of assets that are recorded at fair value on a recurring basis (in thousands):



	October 31, 2011
	Level 1		Level 2		Level 3		Total
Assets:
U.S government obligations	$	50,264	$	—	$	—	$	50,264
Embedded redemption feature	—		—		7,020		7,020
Total assets measured at fair value	$	50,264	$	—	$	7,020	$	57,284



	October 31, 2012
	Level 1		Level 2		Level 3		Total
Assets:
U.S. government obligations	$	50,057	$	—	$	—	$	50,057
Embedded redemption feature	—		—		420		420
Total assets measured at fair value	$	50,057	$	—	$	420	$	50,477

As of the dates indicated, the assets above were presented on Ciena’s Consolidated Balance Sheet as follows (in thousands):



	October 31, 2011
	Level 1		Level 2		Level 3		Total
Assets:
Long-term investments	$	50,264	$	—	$	—	$	50,264
Other long-term assets	—		—		7,020		7,020
Total assets measured at fair value	$	50,264	$	—	$	7,020	$	57,284



	October 31, 2012
	Level 1		Level 2		Level 3		Total
Assets:
Short-term investments	$	50,057	$	—	$	—	$	50,057
Other long-term assets	—		—		420		420
Total assets measured at fair value	$	50,057	$	—	$	420	$	50,477

Ciena’s Level 3 assets included in other long-term assets reflect an embedded redemption feature contained within Ciena’s 4.0% convertible senior notes. See Note 13 below. The embedded redemption feature is bifurcated from Ciena’s 4.0% convertible senior notes using the “with-and-without” approach. As such, the total value of the embedded redemption feature is calculated as the difference between the value of the 4.0% convertible senior notes (the “Hybrid Instrument”) and the value of an identical instrument without the embedded redemption feature (the “Host Instrument”). Both the Host Instrument and the Hybrid Instrument are valued using a modified binomial model. The modified binomial model utilizes a risk free interest rate, an implied volatility of Ciena’s stock, the recovery rates of bonds and the implied default intensity of the 4.0% convertible senior notes.

As of the dates indicated, the following table sets forth, in thousands, the reconciliation of changes in Level 3 assets recorded at fair value:



	Level 3
Balance at October 31, 2011	$	7,020
Issuances	—
Settlements	—
Changes in unrealized gain	(6,600		)
Transfers into Level 3	—
Transfers out of Level 3	—
Balance at October 31, 2012	$	420