FAIR VALUE MEASUREMENTS AND THE FAIR VALUE OPTION

The following table presents fair value measurements (including items that are required to be measured at fair value and items for which the fair value option has been elected) as of September 30, 2015:



(Dollars in millions)	Level 1		Level 2			Level 3		Total
Marketable securities	$	0.3	$	—		$	—	$	0.3
Unconsolidated investments	—		—			206.1		206.1
Currency forward contracts	—		20.0			—		20.0
Currency option contracts	—		(2.9		)	—		(2.9		)
Total	$	0.3	$	17.1		$	206.1	$	223.5



(Dollars in millions)	Level 1		Level 2		Level 3		Total
Marketable securities	$	6.5	$	—	$	—	$	6.5
Unconsolidated investments	—		—		85.9		85.9
Currency forward contracts	—		23.9		—		23.9
Currency option contracts	—		6.7		—		6.7
Total	$	6.5	$	30.6	$	85.9	$	123.0

Marketable Securities

Marketable securities include Kennedy Wilson's investment in publicly traded equity securities. The carrying value of marketable securities is a level 1 valuation as the fair value is based off of unadjusted quoted market prices in active markets for identical securities. The amount above excludes Kennedy Wilson's 24.0 million shares in KWE as the investment is eliminated due to the consolidation of KWE's results in KW Group's consolidated financial statements. Based on the September 30, 2015 share price, Kennedy Wilson's investment in KWE had a market value of approximately $413.5 million (cost basis of $401.5 million) based on a per share price of $17.22 at September 30, 2015. As of September 30, 2015, the Company had hedged 84.4% of the foreign currency rate risk of its net investment in KWE by entering into currency forward contracts and options, which had a fair value of $12.4 million.

Fair Value and Fair Value Option - Unconsolidated Investments

Kennedy Wilson records its investments in certain funds it manages and sponsors ("the Funds") based upon the net assets that would be allocated to its interests in the Funds assuming the Funds were to liquidate their investments at fair value as of the reporting date. Kennedy Wilson’s investment balance in the Funds was $33.3 million and $24.9 million at September 30, 2015 and December 31, 2014, respectively, which is included in unconsolidated investments in the accompanying consolidated balance sheets. As of September 30, 2015, Kennedy Wilson had unfunded capital commitments to the Funds in the amount of $38.1 million.

Kennedy Wilson elected to use the fair value option ("FV Option") for five unconsolidated investments to more accurately reflect the timing of the value created in the underlying investments and report those results in current operations. Kennedy Wilson's investment balance in the FV Option investments was $172.8 million and $61.0 million at September 30, 2015 and December 31, 2014, respectively, which is included in unconsolidated investments in the accompanying balance sheets. The increase in the fair value option investments related to the Company's investment in VHH during the second quarter, obtaining entitlements on a land development project, and starting a condo disposition program during the quarter ended September 30, 2015. Refer to Note 5 for more detail.

In estimating fair value of real estate held by the Funds and the five FV Option investments, we consider significant unobservable inputs such as capitalization and discount rates.

The following table summarizes our investments in unconsolidated investments held at fair value by type:



(Dollars in millions)	September 30, 2015		December 31, 2014
Funds	$	33.3	$	24.9
FV Option	172.8		61.0
Total	$	206.1	$	85.9

The following table presents changes in Level 3 investments for the three and nine months ended September 30, 2015 and 2014:



	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in millions)	2015			2014			2015			2014
Beginning balance	$	186.6		$	78.5		$	85.9		$	81.1
Unrealized gains	5.9			—			24.1			—
Unrealized losses	—			—			(0.1		)	—
Realized Gains	5.2			—			5.2			—
Contributions	16.5			16.9			107.7			19.3
Distributions	(8.1		)	(5.0		)	(16.4		)	(10.0		)
Other	—			—			(0.3		)	—
Ending balance	$	206.1		$	90.4		$	206.1		$	90.4

Unobservable inputs for real estate

The table below describes the range of unobservable inputs for real estate assets:



	Estimated Rates Used for
	Capitalization Rates	Discount Rates
Office	5.25% - 8.25%	7.00% - 11.00%
Retail	6.70% - 7.00%	8.00% - 9.00%
Hotel	6.50%	7.50%
Multifamily	4.40% - 7.00%	4.90% - 10.75%
Loan	n/a	12.00% - 25.50%
Land and condominium units	n/a	8.00% - 9.00%

In valuing real estate, related assets and indebtedness, we consider significant inputs such as the term of the debt, value of collateral, market loan-to-value ratios, market interest rates and spreads, and credit quality of investment entities. The credit spreads used for these types of investments range from 1.00% to 4.87%.

The accuracy of estimating fair value for investments utilizing unobservable inputs cannot be determined with precision and cannot be substantiated by comparison to quoted prices in active markets. As such, estimated fair value may not be realized in a current sale or immediate settlement of the asset or liability. Additionally, there are inherent uncertainties in any fair value measurement technique, and changes in the underlying assumptions used, including cap rates, discount rates, liquidity risks, and estimates of future cash flows, could significantly affect the fair value measurement amounts.

Currency derivative contracts

KW Group uses foreign currency derivative contracts such as forward contracts and options to manage its foreign currency risk exposure against the effects of a portion of its certain non-U.S. dollar denominated currency net investments. Foreign currency options are valued using a variant of the Black-Scholes model tailored for currency derivatives and the foreign currency forward contracts are valued based on the difference between the contract rate and the forward rate at maturity of the underlying currency applied to the notional value in the underlying currency discounted at a market rate for similar risks. Although we have determined that the majority of the inputs used to value its currency derivative contracts fall within Level 2 of the fair value hierarchy, the counterparty risk adjustments associated with the currency derivative contracts utilize Level 3 inputs. However, as of September 30, 2015, KW Group assessed the significance of the impact of the counterparty valuation adjustments on the overall valuation of its currency derivative contracts and determined that the counterparty valuation adjustments are not significant to the overall valuation of its currency derivative contracts. As a result, we have determined that the valuation of our derivative instruments in its entirety be classified in Level 2 of the fair value hierarchy.

Changes in fair value are recorded in other comprehensive income in the accompanying consolidated statements of comprehensive income (loss) as the portion of the currency derivative contracts used to hedge foreign currency exposure of its certain net investments in foreign operations qualifies as a net investment hedge under FASB ASC Topic 815. The fair value of the currency derivative contracts held as of September 30, 2015 are reported in other assets for hedge assets and included in accrued expenses and other liabilities for hedge liabilities on the balance sheet. See note 11 for a complete discussion on other comprehensive income including currency derivative contracts and foreign currency translations.

The table below details the currency derivative contracts KW Group held as of September 30, 2015:



(Dollars in millions)										Change in Unrealized Gains (Losses)
Currency Hedged	Type	Underlying Currency	Notional Amount	Trade Date	Settlement/Expiration Date	Forward Rate/Strike Price	Fair Value			Nine Months Ended September 30, 2015
EUR	Forward	USD	€20,000,000	6/25/2014	6/27/2019	1.4471	$	5.2		$	2.5
EUR ⁽²⁾	Option	USD	€130,000,000	3/10/2015 - 3/19/2015	3/7/2019 - 3/19/2020	1.0700 - 1.0960	(2.1		)	(2.1		)
GBP⁽²⁾	Forward	USD	£103,000,000	2/25/2014 - 8/10/2015	10/9/2018 - 8/12/2020	1.5578 - 1.6371	10.5			6.7
GBP	Option	USD	£100,200,000	1/7/2015 - 8/17/2015	1/7/2016 - 8/17/2020	1.4235 - 1.5434	1.9			0.7
EUR⁽¹⁾	Forward	GBP	€347,477,119	6/18/2014 - 6/29/2015	6/15/2016 - 6/30/2022	0.7110 - 0.8621	4.4			(1.8		)
EUR⁽¹⁾	Option	GBP	€175,000,000	3/13/2015 - 6/3/2015	3/15/2018 - 6/3/2020	0.7070 - 0.7500	(2.7		)	(2.7		)
YEN	Forward	USD	¥649,000,000	6/23/2015 - 8/21/2015	2/25/2016 - 6/25/2020	111.26 - 121.51	(0.1		)	(0.1		)
Total⁽³⁾							$	17.1		$	3.2

⁽¹⁾ Hedge is held by KWE on its wholly-owned subsidiaries.

⁽²⁾ For the nine months ended September 30, 2015, $5.7 million loss recognized through other income on the consolidated statement of operations, due to portion of hedge not designated as a net investment hedge.

⁽³⁾ Hedges are presented gross in the consolidated balance sheet. Hedge assets are included in other assets and hedge liabilities are included in other liabilities.

In addition to the hedge assets held above there was $10.6 million of unrealized gains recognized through other comprehensive income and $3.2 million of gains recognized through the consolidated statement of operations on currency derivative contracts that were settled during the period. These gains will remain in accumulated other comprehensive income until the underlying investments they were hedging are substantially liquidated by KW Group. There was also $15.1 million of gains recognized through the consolidated statement of operations associated with currency derivative contracts that were related to the Company's sale of its Japanese multifamily portfolio and resolutions of European loan pool investments.

KW Group also enters into zero-cost collar option contracts to hedge a portion of its net investment in certain non-U.S. dollar denominated foreign operations. The strike prices above represent the put strike prices associated with those contracts. KW Group will participate in the currency appreciation up to the strike price of the call options, which it sold to offset the cost of the purchased put options.

Fair value of financial instruments

The carrying amounts of cash and cash equivalents, accounts receivable including related party receivables, accounts payable, accrued expenses and other liabilities, accrued salaries and benefits, and deferred and accrued income taxes approximate fair value due to their short-term maturities. The carrying value of loans (excluding related party loans as they are presumed not to be an arm’s length transaction) approximates fair value as the terms are similar to loans with similar characteristics available in the market.

We account for our debt liabilities at face value plus net unamortized debt premiums and any fair value adjustments as part of business combinations. The fair value as of September 30, 2015 and December 31, 2014 for the senior notes payable, investment debt and junior subordinated debentures were estimated to be approximately $3,979.6 million and $3,044.8 million, respectively, based on a comparison of the yield that would be required in a current transaction, taking into consideration the risk of the underlying collateral and our credit risk to the current yield of a similar security, compared to their carrying value of $3,999.1 million and $3,023.3 million at September 30, 2015 and December 31, 2014, respectively. The inputs used to value our senior notes payable, borrowings under lines of credit, mortgage loans payable and junior subordinated debentures are based on observable inputs for similar assets and quoted prices in markets that are not active and are therefore determined to be level 2 inputs.