Fannie Mae 2004 Annual Report Download - page 318

Although derivative instruments are critical to our interest rate risk management strategy, we did not apply
hedge accounting to instruments entered into during the three-year period ended December 31, 2004. As such,
all fair value changes and gains and losses on these derivatives, including accrued interest, were recognized as
“Derivatives fair value losses, net” in the consolidated statements of income.
Prior to our adoption of SFAS 133, certain of our derivative instruments met the criteria for hedge accounting
under the accounting standards at that time. Accordingly, effective with our adoption of SFAS 133, we
deferred gains of approximately $230 million from fair value-type hedges as basis adjustments to the related
debt and $75 million for cash flow-type hedges in AOCI. We recorded amortization related to the fair value-
type hedges of $31 million, $42 million and $37 million for the years ended December 31, 2004, 2003 and
2002, respectively, as a reduction of “Interest expense” in the consolidated statements of income. We recorded
amortization related to the cash flow-type hedges of $7 million, $8 million and $17 million for the years
ended December 31, 2004, 2003 and 2002, respectively, as a reduction of “Interest expense” in the
consolidated statements of income.
Derivatives
We issue various types of debt to finance the acquisition of mortgages and mortgage-related securities. We use
interest rate swaps and interest rate options, in combination with our debt issuances, to better match both the
duration and prepayment risk of our mortgages and mortgage-related securities, which we would not be able
to accomplish solely through the issuance of debt. These instruments primarily include interest rate swaps,
swaptions and caps. Interest rate swaps provide for the exchange of fixed and variable interest payments based
on contractual notional principal amounts. These may include callable swaps, which give counterparties or us
the right to terminate interest rate swaps before their stated maturities. Swaptions provide us with an option to
enter into interest rate swaps at a future date. Caps provide ceilings on the interest rates of our variable-rate
debt. We also use basis swaps, which provide for the exchange of variable payments based on different interest
rate indices, such as the Treasury Bill rate, the Prime rate, or the London Inter-Bank Offered Rate. Although
our foreign-denominated debt represents approximately 1% of total debt outstanding as of December 31, 2004
and 2003, we enter into foreign currency swaps to effectively convert our foreign-denominated debt into
U.S. dollars.
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)