Freddie Mac 2015 Annual Report Download - page 148

Management's Discussion and Analysis Risk Management | Interest Rate Risk and Other Market Risks
Freddie Mac 2015 Form 10-K 146
programs, loan modifications, and the volatility and impact of home price movements on mortgage
durations. Mis-estimation of prepayments, resulting in over or under hedging of interest-rate risk, could
result in significant economic losses and have an adverse impact on earnings. In addition, this mis-
estimation could result in realized losses upon the sale of assets.
The table below provides duration gap, estimated point-in-time and minimum and maximum PMVS-L and
PMVS-YC results, and an average of the daily values and standard deviation for the years ended
December 31, 2015 and 2014. The table below also provides PMVS-L estimates assuming an immediate
100 basis point shift in the LIBOR yield curve. We do not hedge the 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. We are providing certain of the disclosures below pursuant to a disclosure
commitment with FHFA.
PMVS-YC PMVS-L
(in millions) 25 bps 50 bps 100 bps
Assuming shifts of the LIBOR yield curve:
December 31, 2015 $ 12 $ 50 $ 186
December 31, 2014 $ — $ 102 $396
Year Ended December 31,
2015 2014
(duration gap in
months, dollars in
millions) Duration
Gap PMVS-YC 25 bps PMVS-L 50 bps Duration Gap PMVS-YC 25 bps PMVS-L 50 bps
Average 0.2 $ 17 $ 90 (0.1) $ 14 $ 69
Minimum (0.4) $ — $ 23 (2.4) $ — $ —
Maximum 1.0 $ 47 $ 249 0.7 $ 65 $ 509
Standard deviation 0.3 $ 12 $ 40 0.4 $ 14 $ 79
Derivatives have historically enabled us to reduce our interest-rate risk exposure. The table below shows
that the PMVS-L risk levels assuming a 50 basis point shift in the LIBOR yield curve for the periods
presented would have been higher if we had not used derivatives.
PMVS-L (50 bps)
(in millions) Before Derivatives After Derivatives Effect of Derivatives
December 31, 2015 $ 3,373 $ 50 $ (3,323)
December 31, 2014 $ 3,226 $102 $(3,124)
While we manage our interest-rate risk exposure on an economic basis to a low level as measured by our
models, the accounting treatment for our financial assets and liabilities (i.e., some are measured at
amortized cost, while others are measured at fair value), including derivatives, creates volatility in our
earnings when interest rates fluctuate. Based upon the composition of our financial assets and liabilities,
including derivatives, at December 31, 2015, we generally recognize fair value losses in earnings when
interest rates decline. The table below presents the estimated adverse net effect on pre-tax earnings of
certain immediate shifts in interest rates. These estimates are essentially the derivative gains (losses)
attributable to financial instruments that are not measured at fair value, as discussed in "Consolidated
Results of Operations - Interest-Rate Risk Management Activities." The methodology used to calculate