MetLife 2010 Annual Report Download - page 150

and receives a premium for written swaptions. Swaptions are included in interest rate options in the preceding table. The Company utilizes
swaptions in non-qualifying hedging relationships.
The Company writes covered call options on its portfolio of U.S. Treasuries as an income generation strategy. In a covered call transaction,
the Company receives a premium at the inception of the contract in exchange for giving the derivative counterparty the right to purchase the
referenced security from the Company at a predetermined price. The call option is “covered” because the Company owns the referenced
security over the term of the option. Covered call options are included in interest rate options in the preceding table. The Company utilizes
covered call options in non-qualifying hedging relationships.
The Company enters into interest rate 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. The Company also uses interest rate forwards to sell to be announced securities as
economic hedges against the risk of changes in the fair value of mortgage loans held-for-sale and interest rate lock commitments. The
Company utilizes interest rate forwards in cash flow and non-qualifying hedging relationships.
Interest rate lock commitments are short-term commitments to fund mortgage loan applications in process (the pipeline) for a fixed term for
a fixed rate or spread. 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
derivative instruments. Interest rate lock commitments are included in interest rate forwards in the preceding table. Interest rate lock
commitments are not designated as hedging instruments.
A synthetic GIC is a contract that simulates the performance of a traditional guaranteed interest contract 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. Synthetic GICs are not designated as hedging instruments.
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. The Company
utilizes foreign currency swaps in fair value, cash flow, net investment in foreign operations and non-qualifying hedging relationships.
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 utilizes foreign currency forwards in net investment in foreign operations and non-qualifying hedging
relationships.
In exchange-traded currency futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of
which is determined by referenced currencies, 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 currency futures are used primarily to hedge currency mismatches between assets and
liabilities. The Company utilizes exchange-traded currency futures in non-qualifying hedging relationships.
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. The Company uses currency options to hedge against the foreign currency
exposure inherent in certain of its variable annuity products. The Company also uses currency options as an economic hedge of foreign
currency exposure related to the Company’s international subsidiaries. The Company utilizes currency options in non-qualifying hedging
relationships.
The Company uses certain of its foreign currency denominated funding agreements to hedge portions of its net investments in foreign
operations against adverse movements in exchange rates. Such contracts are included in non-derivative hedging instruments in the
preceding table.
Swap spreadlocks are used by the Company to hedge invested assets on an economic basis against the risk of changes in credit spreads.
Swap spreadlocks 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. The
Company utilizes swap spreadlocks in non-qualifying hedging relationships.
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 hedge 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. The Company utilizes credit default
swaps in non-qualifying hedging relationships.
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 for the purpose of generating profits on short-term
differences in price. These credit default swaps are not designated as hedging instruments.
The Company enters into forwards to lock in the price to be paid for forward purchases of certain securities. The price is agreed upon at the
time of the contract and payment for the contract is made at a specified future date. When the primary purpose of entering into these
F-61MetLife, Inc.
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)