Freddie Mac 2004 Annual Report Download - page 213

and $54 million loss, respectively. No amounts have been excluded from the assessment of eÅectiveness for
derivatives designated as cash Öow hedges for 2004, 2003 and 2002.
At December 31, 2004, the maximum remaining length of time over which Freddie Mac has hedged the
exposure related to the variability in future cash Öows on forecasted transactions is 29 years. However, over
90 percent of the AOCI, net of taxes, balance at December 31, 2004 relating to cash Öow hedges is
attributable to cash Öow hedges of the exposure related to the variability in future cash Öows on forecasted
transactions occurring in the next 10 years. The occurrence of forecasted transactions may be satisÑed by
either periodic issuances of short-term debt over the required time period or longer term debt, such as
Reference Notes» securities, with maturities covering all or part of the remaining hedge time period.
AOCI amounts are reclassiÑed to earnings as the associated hedged forecasted issuance of debt and
forecasted mortgage purchase transaction aÅects earnings. During 2004, 2003 and 2002, pre-tax amounts
reclassiÑed into earnings also include net gains of $2 million, $29 million and $116 million, respectively,
resulting from the determination that it was probable that forecasted transactions related to certain mortgage
purchases and sales would not occur. At December 31, 2004, the total AOCI, net of taxes, related to cash-Öow
hedge relationships was a loss of $7.9 billion. The $7.9 billion in hedging losses related to cash-Öow hedges was
composed of less than $0.1 billion in net unrealized losses on open cash Öow hedges and approximately
$7.9 billion in deferred net losses on closed cash Öow hedges. The unrealized fair value losses on open cash
Öow hedges can change substantially due to future changes in interest rates. Closed cash Öow hedges involve
derivatives that have been terminated or are no longer designated as cash Öow hedges. Fluctuations in
prevailing market interest rates have no impact on the deferred portion of AOCI relating to losses on closed
cash Öow hedges. The company estimates that approximately $1.6 billion, net of taxes, of the $7.9 billion of
hedging losses in AOCI, net of taxes, at December 31, 2004 will be reclassiÑed into earnings during 2005.
Table 12.1 presents the changes in AOCI, net of taxes, related to derivatives designated as cash Öow
hedges. The Net change in fair value related to cash Öow hedging activities, net of tax beneÑt line represents
the net changes in the fair value of the derivatives that were designated as cash-Öow hedges throughout the
year, after the eÅects of Freddie Mac's statutory tax rate of 35 percent, to the extent the hedges were eÅective.
The Net reclassiÑcations of losses to earnings, net of tax beneÑt line represents the AOCI amount, after the
eÅects of Freddie Mac's statutory tax rate of 35 percent, that was recognized in earnings as the originally
hedged forecasted transactions aÅected earnings unless it was deemed probable that the forecasted transaction
would not occur. If it is probable that the forecasted transaction will not occur, then the entire deferred gain or
loss associated with the hedge related to the forecasted transaction is reclassiÑed into earnings immediately.
Table 12.1 Ì AOCI, net of taxes, Related to Cash Flow Hedge Relationships
Year Ended December 31,
2004 2003 2002
(dollars in millions)
Beginning Balance(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(7,837) $(9,877) $(4,757)
Net change in fair value related to cash Öow hedging activities, net of
tax beneÑt of $(1,089), $(352) and $(4,516), respectively(2)ÏÏÏÏÏÏÏÏÏ (2,021) (653) (8,388)
Net reclassiÑcations of losses to earnings, net of tax beneÑt of $1,042,
$1,450 and $1,760, respectively(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,934 2,693 3,268
Ending Balance(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(7,924) $(7,837) $(9,877)
(1) Represents the eÅective portion of the fair value of open derivative contracts (i.e., net unrealized gains and losses) and net deferred
gains and losses on closed (i.e., terminated or redesignated) cash Öow hedges.
(2) Net reclassiÑcations to earnings, net of tax expense includes the accrual of periodic cash settlements in accordance with the
contractual terms of the derivatives designated in cash Öow hedge relationships for all periods presented above.
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