2012 Annual Report  Note 9 FINANCIAL INSTRUMENTS  49  $^{ }$Level 3 unobservable inputs are used when little or no market data is available. Valuation models for the Auction Rate Security  (ARS) and Floating Rate Security (FRS) portfolio are based on expected cash flow streams and collateral values including  assessments of counterparty credit quality, default risk underlying the security, discount rates and overall capital market liquidity. The fair value of the ARS was determined using an internally developed valuation which was based in part on indicative bids  received on the underlying assets of the security and other evidence of fair value. The ARS is a private placement security rated  ‘BBB-’ by Standard and Poor’s as of December 31, 2012 and represents interests in insurance securitizations. Due to the current  lack of an active market for FRS and the general lack of transparency into their underlying assets, other qualitative analysis is  relied upon to value FRS including discussions with brokers and fund managers, default risk underlying the security and overall  capital markets liquidity.  $^{ }$Level 2 inputs utilize observable prices for similar instruments, non-binding quoted prices for identical or similar instruments in  markets that are not active, and other observable inputs that can be corroborated by market data for substantially the full term of  the assets or liabilities. These instruments include corporate debt securities, commercial paper, Federal Deposit Insurance  Corporation (FDIC) insured debt securities, certificates of deposit, money market funds, foreign currency forward contracts,  interest rate swap contracts, equity funds, fixed income funds and long-term debt. Additionally, certain corporate debt securities  utilize a third-party matrix pricing model that uses significant inputs corroborated by market data for substantially the full term of  the assets. Equity and fixed income funds are primarily invested in publicly traded securities and are valued at the respective net  asset value of the underlying investments. There were no significant unfunded commitments or restrictions on redemptions  related to equity and fixed income funds as of December 31, 2012. Level 2 derivative instruments are valued using London  Interbank Offered Rate (LIBOR) and Euro Interbank Offered Rate (EURIBOR) yield curves, less credit valuation adjustments,  and observable forward foreign exchange rates at the reporting date. Valuations of derivative contracts may fluctuate  considerably from period-to-period due to volatility in underlying foreign currencies and underlying interest rates, which are  driven by market conditions and the duration of the contract. Credit adjustment volatility may have a significant impact on the  valuation of interest rate swaps due to changes in counterparty credit ratings and credit default swap spreads.  Level 1 inputs utilize non-binding quoted prices (unadjusted) in active markets that are accessible at the measurement date for  identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. These instruments include U.S.  treasury securities.  Fair Value Measurements  − The fair values of financial instruments are classified into one of the following categories:  Financial instruments are subject to counterparty credit risk which is considered as part of the overall fair value measurement. Counterparty credit risk is monitored on an ongoing basis and mitigated by limiting amounts outstanding with any individual  counterparty, utilizing conventional derivative financial instruments and only entering into agreements with counterparties that meet  high credit quality standards. The consolidated financial statements would not be materially impacted if any counterparty failed to  perform according to the terms of its agreement. Collateral is not required by any party whether derivatives are in an asset or liability  position under the terms of the agreements.  Changes in currency exchange rates and interest rates create exposure to market risk. Certain derivative financial instruments are used  when available on a cost-effective basis to hedge the underlying economic exposure. These instruments qualify as cash flow, net  investment and fair value hedges upon meeting certain criteria, including effectiveness of offsetting hedged exposures. Changes in  fair value of derivatives that do not qualify for hedge accounting are recognized in earnings as they occur. Derivative financial  instruments are not used for trading purposes.  Financial instruments include cash and cash equivalents, marketable securities, accounts receivable and payable, debt instruments and  derivatives. The carrying amount of receivables and accounts payable approximates fair value due to their short term maturity. 