Freddie Mac 2010 Annual Report Download - page 172

entire prepayment risk exposure embedded in our mortgage assets. The interest rate sensitivity of a mortgage portfolio varies
across a wide range of interest rates. Therefore, the difference between PMVS at 50 basis points and 100 basis points is non-
linear. Accordingly, as shown in Table 66, the PMVS-L results based on a 100 basis point shift in the LIBOR curve are
disproportionately higher at December 31, 2010, than the PMVS-L results based on a 50 basis point shift in the LIBOR
curve.
Table 66 — PMVS Results
25 bps 50 bps 100 bps
PMVS-YC PMVS-L
(in millions)
Assuming shifts of the LIBOR yield curve:
December 31, 2010 ................................................................. $35 $588 $1,884
December 31, 2009 ................................................................. $10 $329 $1,246
Duration
Gap
PMVS-YC
25 bps
PMVS-L
50 bps
Duration
Gap
PMVS-YC
25 bps
PMVS-L
50 bps
2010 2009
Year Ended December 31,
(in months) (dollars in millions) (in months) (dollars in millions)
Average . . . . . . . . . . . . . ............................... 0.0 $23 $338 0.4 $ 74 $ 476
Minimum . . . . . . . . . . . . ............................... (0.7) $— $ — (0.5) $ — $ —
Maximum. . . . . . . . . . . . ............................... 0.7 $83 $668 1.8 $219 $1,127
Standard deviation . . . . . . ............................... 0.3 $18 $179 0.4 $ 52 $ 169
Derivatives have historically enabled us to keep our interest-rate risk exposure at consistently low levels in a wide range
of interest-rate environments. Table 67 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 67 — Derivative Impact on PMVS-L (50 bps)
Before
Derivatives
After
Derivatives
Effect of
Derivatives
(in millions)
At:
December 31, 2010 . . . . . ....................................................... $3,614 $588 $(3,026)
December 31, 2009 . . . . . ....................................................... $3,507 $329 $(3,178)
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 2010 and
2009 was zero months in both periods. Our average duration gap, rounded to the nearest month, during the years ended
December 31, 2010 and 2009 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
We use derivatives primarily to:
• hedge forecasted issuances of debt;
• 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.”)
The derivatives we use to hedge interest-rate and foreign-currency risk are common in the financial markets. We
principally use the following types of derivatives:
• LIBOR- and Euribor-based interest-rate swaps;
• LIBOR- and Treasury-based options (including swaptions);
169 Freddie Mac