Fannie Mae 2010 Annual Report Download - page 94

Table 9: Fair Value Losses, Net
2010 2009 2008
For the Year Ended December 31,
(Dollars in millions)
Risk management derivatives fair value losses attributable to:
Net contractual interest expense accruals on interest rate swaps . . . . . . . . . . . . . . $(2,895) $(3,359) $ (1,576)
Net change in fair value during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,088 (1,337) (13,387)
Total risk management derivatives fair value losses, net . . . . . . . . . . . . . . . . . . (1,807) (4,696) (14,963)
Mortgage commitment derivatives fair value losses, net . . . . . . . . . . . . . . . . . . . . . . (1,193) (1,654) (453)
Total derivatives fair value losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,000) (6,350) (15,416)
Trading securities gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,692 3,744 (7,040)
Hedged mortgage assets gains, net
(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 2,154
Debt foreign exchange gains (losses), net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (77) (173) 230
Debt fair value gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (32) (57)
Mortgage loans fair value losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (131) — —
Fair value losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (511) $(2,811) $(20,129)
2010 2009 2008
5-year swap interest rate:
As of March 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.73% 2.22% 3.31%
As of June 30. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.06 2.97 4.26
As of September 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.51 2.65 4.11
As of December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.18 2.98 2.13
(1)
Represents adjustments to the carrying value of mortgage assets designated for hedge accounting that are attributable
to changes in interest rates.
Risk Management Derivatives Fair Value Losses, Net
Risk management derivative instruments are an integral part of our management of interest rate risk. We
supplement our issuance of debt securities with derivative instruments to further reduce duration and
prepayment risks. We generally are the purchaser of risk management derivatives. In cases where options
obtained through callable debt issuances are not needed for risk management derivative purposes, we may sell
options in the over-the-counter derivatives market in order to offset the options obtained in the callable debt.
Our principal purpose in using derivatives is to manage our aggregate interest rate risk profile within
prescribed risk parameters. We generally use only derivatives that are relatively liquid and straightforward to
value. We consider the cost of derivatives used in our management of interest rate risk to be an inherent part
of the cost of funding and hedging our mortgage investments and economically similar to the interest expense
that we recognize on the debt we issue to fund our mortgage investments.
We present, by derivative instrument type, the fair value gains and losses on our derivatives for the years
ended December 31, 2010, 2009 and 2008 in “Note 10, Derivative Instruments and Hedging Activities.”
The primary factors affecting the fair value of our risk management derivatives include the following.
•Changes in interest rates: Our derivatives, in combination with our issuances of debt securities, are
intended to offset changes in the fair value of our mortgage assets, which tend to increase in value when
interest rates decrease and, conversely, decrease in value when interest rates rise. Pay-fixed swaps
decrease in value and receive-fixed swaps increase in value as swap interest rates decrease (with the
opposite being true when swap interest rates increase). Because the composition of our pay-fixed and
receive-fixed derivatives varies across the yield curve, the overall fair value gains and losses of our
derivatives are sensitive to flattening and steepening of the yield curve.
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