MetLife 2007 Annual Report Download - page 130

in the preceding table. At December 31, 2007 and 2006, the Company owned 695,485 and 225,000 equity variance swaps, respectively.
Fair values of equity variance swaps are included in financial forwards in the preceding table. At December 31, 2007 and 2006, the
Company owned 77,374,937 and 74,864,483 equity options, respectively. Fair values of equity options are included in options in the
preceding table.
The following table presents the notional amount of derivative financial instruments by maturity at December 31, 2007:
One Year or
Less
After One Year
Through Five
Years
After Five Years
Through Ten
Years After Ten Years Total
Remaining Life
(In millions)
Interestrateswaps.......................... $14,844 $30,113 $ 9,918 $ 7,644 $ 62,519
Interestratefloors .......................... — 15,619 33,318 — 48,937
Interestratecaps........................... 29,905 15,593 — — 45,498
Financialfutures ........................... 10,730 — — 87 10,817
Foreign currency swaps . . . . . . . . . . . . . . . . . . . . . . 1,632 9,068 7,434 3,265 21,399
Foreigncurrencyforwards..................... 4,175 — — 10 4,185
Options................................. — 620 1,250 173 2,043
Financialforwards .......................... — — — 4,600 4,600
Credit default swaps . . . . . . . . . . . . . . . . . . . . . . . . . 509 4,582 1,510 249 6,850
SyntheticGICs ............................ 3,670 — — — 3,670
Other................................... — — — 250 250
Total.................................. $65,465 $75,595 $53,430 $16,278 $210,768
Interest rate swaps are used by the Company primarily to reduce market risks from changes in interest rates and to alter interest rate
exposure arising from mismatches between assets and liabilities (duration mismatches). In an interest rate swap, the Company agrees with
another party to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts as calculated by
reference to an agreed notional principal amount. These transactions are entered into pursuant to master agreements that provide for a
single net payment to be made by the counterparty at each due date.
The Company also enters into basis swaps to better match the cash flows from assets and related liabilities. In a basis swap, both legs
of the swap are floating with each based on a different index. Generally, no cash is exchanged at the outset of the contract and no principal
payments are made by either party. A single net payment is usually made by one counterparty at each due date. Basis swaps are included
in interest rate swaps in the preceding table.
Interest rate caps and floors are used by the Company primarily to protect its floating rate liabilities against rises in interest rates above a
specified level, and against interest rate exposure arising from mismatches between assets and liabilities (duration mismatches), as well as
to protect its minimum rate guarantee liabilities against declines in interest rates below a specified level, respectively.
In exchange-traded interest rate (Treasury and swap) and equity futures transactions, the Company agrees to purchase or sell a
specified number of contracts, the value of which is determined by the different classes of interest rate and equity securities, and to post
variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. The Company enters into
exchange-traded futures with regulated futures commission merchants that are members of the exchange.
Exchange-traded interest rate (Treasury and swap) futures are used primarily to hedge mismatches between the duration of assets in a
portfolio and the duration of liabilities supported by those assets, to hedge against changes in value of securities the Company owns or
anticipates acquiring, and to hedge against changes in interest rates on anticipated liability issuances by replicating Treasury or swap curve
performance. The value of interest rate futures is substantially impacted by changes in interest rates and they can be used to modify or
hedge existing interest rate risk.
Exchange-traded equity futures are used primarily to hedge liabilities embedded in certain variable annuity products offered by the
Company.
Foreign currency derivatives, including foreign currency swaps, foreign currency forwards and currency option contracts, are used by
the Company to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets and liabilities denominated
in foreign currencies. The Company also uses foreign currency forwards and swaps to hedge the foreign currency risk associated with
certain of its net investments in foreign operations.
In a foreign currency swap transaction, the Company agrees with another party to exchange, at specified intervals, the difference
between one currency and another at a forward exchange rate calculated by reference to an agreed upon principal amount. The principal
amount of each currency is exchanged at the inception and termination of the currency swap by each party.
In a foreign currency forward transaction, the Company agrees with another party to deliver a specified amount of an identified currency
at a specified future date. The price is agreed upon at the time of the contract and payment for such a contract is made in a different
currency at the specified future date.
The Company enters into currency option contracts that give it the right, but not the obligation, to sell the foreign currency amount in
exchange for a functional currency amount within a limited time at a contracted price. The contracts may also be net settled in cash, based
on differentials in the foreign exchange rate and the strike price. Currency option contracts are included in options in the preceding table.
Swaptions are used by the Company to hedge interest rate risk associated with the Company’s long-term liabilities, as well as to sell, or
monetize, embedded call options in its fixed rate liabilities. A swaption is an option to enter into a swap with an effective date equal to the
exercise date of the embedded call and a maturity date equal to the maturity date of the underlying liability. The Company receives a
premium for entering into the swaption. Swaptions are included in options in the preceding table.
F-34 MetLife, Inc.
MetLife, Inc.
Notes to Consolidated Financial Statements — (Continued)