Freddie Mac 2005 Annual Report Download - page 75

in the LIBOR curve are disproportionately higher than the PMVS-L results based on a 50 basis point shift in the LIBOR
curve.
Table 33 Ì Portfolio Market Value Sensitivity Assuming Shifts of the LIBOR Yield Curve
Potential Pre-Tax Loss in
Portfolio Market Value Sensitivity Portfolio Market Value (in millions)
PMVS-YC PMVS-L PMVS-YC PMVS-L
25 bp 50 bp 100 bp 25 bp 50 bp 100 bp
At:
December 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì% 1% 3% $ 26 $236 $ 798
December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì% 3% 8% $ 25 $725 $2,083
Derivatives have enabled us to keep our interest-rate risk exposure at consistently low levels in a wide range of interest-
rate environments. By keeping PMVS-L and PMVS-YC low, we have been able to reduce the exposure of the fair value of
our stockholders' equity to adverse changes in interest rates.
Table 34 shows that the low PMVS-L risk levels for the periods presented would generally have been higher if we had
not used derivatives to manage our interest-rate risk exposure.
Table 34 Ì Derivative Impact on PMVS
Before After EÅect of
Derivatives Derivatives Derivatives
At December 31, 2005
PMVS-L (50bp) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2% 1% (1)%
PMVS-YC (25bp)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì% Ì% Ì%
At December 31, 2004
PMVS-L (50bp) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7% 3% (4)%
PMVS-YC (25bp)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1% Ì% (1)%
Duration Gap Results. Our estimated average duration gap for the months of December 2005 and 2004 was zero
months and negative one month, respectively.
The disclosure in our Monthly Volume Summary reports, which are available on our website at www.FreddieMac.com,
reÖects the average of the daily PMVS-L, PMVS-YC and Duration Gap estimates for a given reporting period (a month,
quarter or year).
Use of Derivatives and Interest-Rate Risk Management
Use of Derivatives. We use derivatives primarily to:
‚ hedge forecasted issuances of debt and synthetically create callable and non-callable funding;
‚ regularly adjust or rebalance our funding mix in order to more closely match changes in the interest-rate
characteristics of our mortgage assets; and
‚ hedge foreign-currency exposure (discussed above in ""Sources of Interest-Rate Risk and Other Market Risks Ì
Foreign-Currency Risk.'')
Hedge Forecasted Debt Issuances and Create Synthetic Funding. We typically commit to purchase mortgage
investments on an opportunistic basis for a future settlement, typically ranging from two weeks to three months after the date
of the commitment. To facilitate larger and more predictable debt issuances that contribute to lower funding costs, we use
interest-rate derivatives to economically hedge the interest-rate risk exposure from the time we commit to purchase a
mortgage to the time the related debt is issued. We also use derivatives to synthetically create the substantive economic
equivalent of various debt funding structures. For example, the combination of a series of short-term debt issuances over a
deÑned longer-term period and a pay-Ñxed swap with the same maturity as the last issuance is the substantive economic
equivalent of a long-term Ñxed-rate debt instrument of comparable maturity. Similarly, the combination of non-callable debt
and a swaption, or option to enter into a receive-Ñxed swap, with the same maturity as the non-callable debt, is the
substantive economic equivalent of callable debt. These derivatives strategies increase our funding Öexibility and allow us to
better match asset and liability cash Öows, often reducing the overall funding costs.
Adjust Funding Mix. We generally use interest-rate swaps to mitigate contractual funding mismatches between our
assets and liabilities. We also use swaptions and other option-based derivatives to adjust the contractual funding of our debt
in response to changes in the expected lives of mortgage-related assets in the Retained portfolio. As market conditions
dictate, we take rebalancing actions to keep our interest-rate risk exposure within management-set limits. In a declining
interest-rate environment, we typically enter into receive-Ñxed swaps or purchase Treasury-based derivatives to shorten the
duration of our funding to oÅset the declining duration of our mortgage assets. In a rising interest-rate environment, we
typically enter into pay-Ñxed swaps or sell Treasury-based derivatives in order to lengthen the duration of our funding to
oÅset the increasing duration of our mortgage assets.
59 Freddie Mac