MetLife 2008 Annual Report Download - page 169

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 fixed exchange rate, generally set at inception, 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.
Equity index options are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products
offered by the Company. To hedge against adverse changes in equity indices, the Company enters into contracts to sell the equity index
options within a limited time at a contracted price. The contracts will be net settled in cash based on differentials in the indices at the time of
exercise and the strike price. Equity index options are included in options in the preceding table.
The Company enters into financial forwards to buy and sell securities. The price is agreed upon at the time of the contract and payment
for such a contract is made at a specified future date. In connection with the acquisition of a residential mortgage origination and servicing
business in the third quarter of 2008, the Company acquired, as well as commenced issuing, interest rate lock commitments and financial
forwards to sell residential mortgage-backed securities. The Company uses financial forwards to sell securities as economic hedges
against the risk of changes in the estimated fair value of mortgage loans held-for-sale and interest rate lock commitments. Interest rate lock
commitments are short-term commitments to fund mortgage loan applications in process for a fixed term at a fixed price. During the term of
an interest rate lock commitment, the Company is exposed to the risk that interest rates will change from the rate quoted to the potential
borrower. Interest rate lock commitments to fund mortgage loans that will be held-for-sale are considered derivatives pursuant to
SFAS 133. Interest rate lock commitments and financial forwards to sell residential mortgage-backed securities are included in financial
forwards in the preceding table.
Equity variance swaps are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products
offered by the Company. In an equity variance swap, the Company agrees with another party to exchange amounts in the future, based on
changes in equity volatility over a defined period. Equity variance swaps are included in financial forwards in the preceding table.
Swap spread locks are used by the Company to hedge invested assets on an economic basis against the risk of changes in credit
spreads. Swap spread locks are forward transactions between two parties whose underlying reference index is a forward starting interest
rate swap where the Company agrees to pay a coupon based on a predetermined reference swap spread in exchange for receiving a
coupon based on a floating rate. The Company has the option to cash settle with the counterparty in lieu of maintaining the swap after the
effective date. Swap spread locks are included in financial forwards in the preceding table.
Certain credit default swaps are used by the Company to hedge against credit-related changes in the value of its investments and to
diversify its credit risk exposure in certain portfolios. In a credit default swap transaction, the Company agrees with another party, at
specified intervals, to pay a premium to insure credit risk. If a credit event, as defined by the contract, occurs, generally the contract will
require the swap to be settled gross by the delivery of par quantities of the referenced investment equal to the specified swap notional in
exchange for the payment of cash amounts by the counterparty equal to the par value of the investment surrendered.
Credit default swaps are also used to synthetically create investments that are either more expensive to acquire or otherwise
unavailable in the cash markets. These transactions are a combination of a derivative and a cash instrument such as a U.S. Treasury
or Agency security. The Company also enters into certain credit default swaps held in relation to trading portfolios.
A synthetic guaranteed interest contract (“GIC”) is a contract that simulates the performance of a traditional GIC through the use of
financial instruments. Under a synthetic GIC, the policyholder owns the underlying assets. The Company guarantees a rate return on those
assets for a premium.
F-46 MetLife, Inc.
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)