Freddie Mac 2009 Annual Report Download - page 84

Table 16 — Derivative Gains (Losses)
Derivatives not designated as hedging instruments under
the accounting standards for derivatives and hedging
(2)
2009 2008 2007
Year Ended December 31,
Derivative Gains (Losses)
(1)
(in millions)
Interest-rate swaps:
Receive-fixed
Foreign-currency denominated ................................................... $ 64 $ 489 $ (335)
U.S. dollar denominated . . ...................................................... (13,337) 29,732 4,240
Total receive-fixed swaps ..................................................... (13,273) 30,221 3,905
Pay-fixed ................................................................... 27,078 (58,295) (11,362)
Basis (floating to floating) . . ...................................................... (194) 109 —
Total interest-rate swaps .................................................... 13,611 (27,965) (7,457)
Option-based:
Call swaptions
Purchased . . . . . ............................................................ (10,566) 17,242 2,472
Written ................................................................... 248 14 (121)
Put swaptions
Purchased . . . . . ............................................................ 323 (1,095) (4)
Written ................................................................... (321) 156 (72)
Other option-based derivatives
(3)
.................................................... (370) 763 9
Total option-based . . ...................................................... (10,686) 17,080 2,284
Futures. . . . ................................................................... (300) (2,074) 142
Foreign-currency swaps
(4)
.......................................................... 138 (584) 2,341
Forward purchase and sale commitments . ............................................... (708) (112) 445
Credit derivatives. . . . ............................................................ (4) 27 11
Swap guarantee derivatives . . . ...................................................... (20) (4) (2)
Other
(5)
...................................................................... 12 (27) —
Subtotal . . . . . ............................................................ 2,043 (13,659) (2,236)
Accrual of periodic settlements:
Receive-fixed interest rate swaps
(6)
.................................................. 5,817 1,928 (327)
Pay-fixed interest rate swaps ...................................................... (9,964) (3,482) 703
Foreign-currency swaps .......................................................... 89 319 (48)
Other . . . ................................................................... 115 (60) 4
Total accrual of periodic settlements .............................................. (3,943) (1,295) 332
Total . . . . . ............................................................ $ (1,900) $(14,954) $ (1,904)
(1) Gains (losses) are reported as derivative gains (losses) on our consolidated statements of operations.
(2) See “NOTE 13: DERIVATIVES” to our consolidated financial statements for additional information about the purpose of entering into derivatives not
designated as hedging instruments and our overall risk management strategies.
(3) Primarily represents purchased interest rate caps and floors, purchased put options on agency mortgage-related securities, as well as certain written
options, including guarantees of stated final maturity of issued Structured Securities and written call options on agency mortgage-related securities.
(4) Foreign-currency swaps are defined as swaps in which the net settlement is based on one leg calculated in a foreign currency and the other leg
calculated in U.S. dollars.
(5) Related to the bankruptcy of Lehman Brothers Holdings, Inc., or Lehman.
(6) Includes imputed interest on zero-coupon swaps.
Gains (losses) on derivatives not accounted for in hedge accounting relationships are principally driven by changes in
(i) swap interest rates and implied volatility and (ii) the mix and volume of derivatives in our derivatives portfolio.
Our mix and volume of derivatives change period to period as we respond to changing interest rate environments. We
use receive- and pay-fixed interest rate swaps to adjust the interest-rate characteristics of our debt funding in order to more
closely match changes in the interest-rate characteristics of our mortgage-related assets. A receive-fixed swap results in our
receipt of a fixed interest-rate payment from our counterparty in exchange for a variable-rate payment to our counterparty.
Conversely, a pay-fixed swap requires us to make a fixed interest-rate payment to our counterparty in exchange for a
variable-rate payment from our counterparty. Receive-fixed swaps increase in value and pay-fixed swaps decrease in value
when interest rates decrease (with the opposite being true when interest rates increase).
We use swaptions and other option-based derivatives to adjust the interest-rate characteristics of our debt in response to
changes in the expected lives of our investments in mortgage-related securities and mortgage loans. Purchased call and put
swaptions, where we make premium payments, are options for us to enter into receive- and pay-fixed swaps, respectively.
Conversely, written call and put swaptions, where we receive premium payments, are options for our counterparty to enter
into receive and pay-fixed swaps, respectively. The fair values of both purchased and written call and put swaptions are
sensitive to changes in interest rates and are also driven by the market’s expectation of potential changes in future interest
rates (referred to as “implied volatility”). Purchased swaptions generally become more valuable as implied volatility
increases and less valuable as implied volatility decreases. Recognized losses on purchased options in any given period are
limited to the premium paid to purchase the option plus any unrealized gains previously recorded. Potential losses on written
options are unlimited.
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