Freddie Mac 2009 Annual Report Download - page 205

PMVS Results
Table 83 provides both estimated point-in-time PMVS-L and PMVS-YC results at December 31, 2009 and 2008 as well
as an average of daily values during the twelve months ended December 31, 2009 and 2008. Table 83 also provides
PMVS-L estimates assuming an immediate 100 basis point shift in the LIBOR yield curve. Because of our expectations for
higher mortgage refinance activity, in part due to our introduction of the Freddie Mac Relief Refinance Mortgage
SM
product
in April 2009, the prepayment risk, or negative convexity, of our mortgage assets increased significantly. In order to reduce
this risk, we increased our swaption purchase activity during the second and third quarters of 2009. Nevertheless, as shown
in Table 83, the PMVS-L sensitivities are significantly higher at December 31, 2009 than at December 31, 2008 in both
cases assuming a 50 and 100 basis points shift in the LIBOR curve.
Table 83 — PMVS Results
25 bps 50 bps 100 bps
PMVS-YC PMVS-L
(in millions)
Assuming shifts of the LIBOR yield curve:
December 31, 2009 ................................................................. $ 10 $329 $1,246
December 31, 2008 ................................................................. $136 $141 $ 108
25 bps 50 bps
PMVS-YC PMVS-L
(in millions)
Average during the twelve months ended:
December 31, 2009 . . ..................................................................... $74 $476
December 31, 2008 . . ..................................................................... $73 $397
Derivatives have enabled us to keep our interest-rate risk exposure at consistently low levels in a wide range of interest-
rate environments. Table 84 shows that the 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 84 — Derivative Impact on PMVS-L (50 bps)
Before
Derivatives
After
Derivatives
Effect of
Derivatives
(in millions)
At:
December 31, 2009 . . . ......................................................... $3,507 $329 $(3,178)
December 31, 2008 . . . ......................................................... $2,708 $141 $(2,567)
Duration Gap Results
We actively measure and manage our duration gap exposure on a daily basis. In addition to duration gap management,
we also measure and manage the price sensitivity of our portfolio to eleven different specific interest rate changes from three
months to 30 years. The price sensitivity of an instrument to specific changes in interest rates is known as the instrument’s
key rate duration risk. By managing our duration exposure both in aggregate through duration gap and to specific changes in
interest rates through key rate duration, we expect to limit our exposure to interest rate changes for a wide range of interest
rate yield curve scenarios. Our average duration gap, rounded to the nearest month, for the months of December 2009 and
2008 was zero and one month, respectively. Our average duration gap, rounded to the nearest month, for the twelve months
ended December 31, 2009 and 2008 was zero months in both periods.
The disclosure in our Monthly Volume Summary reports, which are available on our website at www.freddiemac.com
and in current reports on Form 8-K we file with the SEC, reflects 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 (see “Sources of Interest-Rate Risk and Other Market Risks — Foreign-Currency
Risk.”)
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