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Fair Value Measurements
 9 Months Ended
Sep. 30, 2016
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
Fair Value Hierarchy—Our financial instruments measured at fair value either on a recurring or a non-recurring basis are classified in a hierarchy for disclosure purposes consisting of three levels based on the observability of inputs in the market place as discussed below:
•
Level 1: Fair value measurements that are quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets.
•
Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
•
Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability.
The fair value of interest rate caps is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rates of the caps. The variable interest rates used in the calculation of projected receipts on the caps are based on an expectation of future interest rates derived from observable market interest rate curves (LIBOR forward curves) and volatilities (the Level 2 inputs). We also incorporate credit valuation adjustments (the Level 3 inputs) to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk.
The fair value of interest rate floors is calculated using a third-party discounted cash flow model based on future cash flows that are expected to be received over the remaining life of the floor. These expected future cash flows are probability-weighted projections based on the contract terms, accounting for both the magnitude and likelihood of potential payments, which are both computed using the appropriate LIBOR forward curve and market implied volatilities as of the valuation date (Level 2 inputs).
The fair value of options on futures contracts is determined based on the last reported settlement price as of the measurement date (Level 1 inputs). These exchange-traded options are centrally cleared, and a clearinghouse stands in between all trades to ensure that the obligations involved in the trades are satisfied.
When a majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. However, when the valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and our counter-parties, which we consider significant (10% or more) to the overall valuation of our derivatives, the derivative valuations in their entirety are classified in Level 3 of the fair value hierarchy. Transfers of inputs between levels are determined at the end of each reporting period.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present our assets and liabilities measured at fair value on a recurring basis aggregated by the level within which measurements fall in the fair value hierarchy (in thousands):
 
Quoted Market Prices (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Total
 
September 30, 2016
 
 
 
 
 
 
Assets
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
Interest rate derivatives - floors
$
—

 
$
2,914

 
$
2,914

 
Interest rate derivatives - caps
—

 
1

 
1

 
Options on futures contracts
97

 
—

 
97

 
 
97

 
2,915

 
3,012

(1) 
Non-derivative assets:
 
 
 
 
 
 
Investment in Ashford Inc.
9,286

 
—

 
9,286

 
Total
$
9,383

 
$
2,915

 
$
12,298

 
 
Quoted Market Prices (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Total
 
December 31, 2015
 
 
 
 
 
 
Assets
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
Interest rate derivatives - floors
$
—

 
$
578

 
$
578

 
Interest rate derivatives - caps
—

 
58

 
58

 
Options on futures contracts
117

 
—

 
117

 
 
117

 
636

 
753

(1) 
Non-derivative assets:
 
 
 
 
 
 
Investment in Ashford Inc.
10,377

 
—

 
10,377

 
Total
$
10,494

 
$
636

 
$
11,130

 
__________________
(1) 
Reported as “derivative assets” in the condensed consolidated balance sheets.
Effect of Fair Value Measured Assets and Liabilities on Condensed Consolidated Statements of Operations
The following table summarizes the effect of fair value measured assets and liabilities on the condensed consolidated statements of operations (in thousands):
 
 
Gain (Loss) Recognized in Income
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2016
 
2015
 
2016
 
2015
 
Assets
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
Interest rate derivatives - floors
 
$
(3,911
)
 
$
(2,059
)
 
$
2,336

 
$
(2,059
)
 
Interest rate derivatives - caps
 
(2
)
 
(2
)
 
(62
)
 
(42
)
 
Equity put options
 
—

 
—

 
—

 
(1,017
)
 
Equity call options
 
—

 
—

 
—

 
23

 
Options on futures contracts
 
(77
)
 
—

 
(134
)
 
—

 
 
 
 
 
 
 


 


 
Non-derivative assets:
 
 
 
 
 
 
 
 
 
Investment in Ashford Inc.
 
(458
)
 
(5,621
)
 
(1,091
)
 
(5,621
)
 
Equity - American Depositary Receipt
 
—

 
—

 
—

 
(75
)
 
Equity securities
 
—

 
—

 
—

 
560

 
U.S. treasury securities
 
—

 
—

 
—

 
53

 
Total
 
(4,448
)
 
(7,682
)
 
1,049

 
(8,178
)
 
Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
Short equity put options
 
—

 
—

 
—

 
680

 
Short equity call options
 
—

 
—

 
—

 
844

 
Net
 
$
(4,448
)
 
$
(7,682
)
 
$
1,049

 
$
(6,654
)
 
Total combined
 
 
 
 
 
 
 
 
 
Interest rate derivatives - floors
 
$
(3,911
)
 
$
(2,059
)
 
$
2,336

 
$
(2,059
)
 
Interest rate derivatives - caps
 
(2
)
 
(2
)
 
(62
)
 
(42
)
 
Options on futures contracts
 
1

 
—

 
(56
)
 
—

 
Unrealized gain (loss) on derivatives
 
(3,912
)
 
(2,061
)
 
2,218

 
(2,101
)
 
Realized loss on options on future contracts
 
(78
)
(1) 
—

(1) 
(78
)
(1) 
—

(1) 
Unrealized loss on investment in Ashford Inc.
 
(458
)
 
(5,621
)
 
(1,091
)
 
(5,621
)
 
Unrealized loss on marketable securities
 
—

 
—

 
—

 
—

 
Realized gain on marketable securities
 
—

(1) 
—

(1) 
—

(1) 
1,068

(1) 
Net
 
$
(4,448
)
 
$
(7,682
)
 
$
1,049

 
$
(6,654
)
 

__________________
(1) 
Reported as “other income (expense)” in the condensed consolidated statements of operations.