Prudential 2002 Annual Report Download - page 139
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Please find page 139 of the 2002 Prudential annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
19. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The carrying amount approximates fair value for the following instruments: fixed maturities available for
sale, equity securities, short-term investments, cash and cash equivalents, restricted cash and securities, separate
account assets and liabilities, trading account assets, broker-dealer related receivables/payables, securities
purchased under agreements to resell, cash collateral for borrowed securities, securities sold under agreements to
repurchase, cash collateral for loaned securities, and securities sold but not yet purchased. The following table
discloses the Company’s financial instruments where the carrying amounts and estimated fair values differ at
December 31,
2002 2001
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
(in millions)
Fixed maturities held to maturity ....................................$ 2,612 $ 2,673 $ 374 $ 395
Commercial loans ................................................ 19,287 21,221 19,729 20,106
Policy loans ..................................................... 8,827 10,714 8,570 9,562
Mortgage securitization inventory .................................... 700 708 1,180 1,185
Investment contracts .............................................. 37,871 38,765 35,379 35,911
Short-term and long-term debt ...................................... 8,226 8,804 10,709 10,840
Guaranteed beneficial interest in Trust holding solely debentures of Parent . . . 690 755 690 690
20. DERIVATIVE INSTRUMENTS
Types of Derivative Instruments
Interest rate swaps are used by the Company to manage interest rate exposures arising from mismatches
between assets and liabilities (including duration mismatches) and to hedge against changes in the value of assets
it anticipates acquiring and other anticipated transactions and commitments. As an example, the Company may
use interest rate swaps to hedge the interest rate risk associated with value of mortgage loans it has originated and
plans to securitize in the future. Under interest rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed rate and floating rate interest amounts calculated by reference to
an agreed notional principal amount. Generally, no cash is exchanged at the outset of the contract and no principal
payments are made by either party. Cash is paid or received based on the terms of the swap. These transactions
are entered into pursuant to master agreements that provide for a single net payment to be made by one
counterparty at each due date.
Exchange-traded futures and options are used by the Company to reduce market risks from changes in
interest rates, to alter mismatches between the duration of assets in a portfolio and the duration of liabilities
supported by those assets, and to hedge against changes in the value of securities it owns or anticipates acquiring
or selling. In exchange-traded futures transactions, the Company agrees to purchase or sell a specified number of
contracts, the value of which are determined by the value of designated classes of 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 and options with regulated futures commissions merchants who are
members of a trading exchange.
Treasury futures typically are used to hedge duration mismatches between assets and liabilities by replicating
Treasury performance. Treasury futures move substantially in value as interest rates change and can be used to
either modify or hedge existing interest rate risk. This strategy protects against the risk that cash flow
requirements may necessitate liquidation of investments at unfavorable prices resulting from increases in interest
rates. This strategy can be a more cost effective way of temporarily reducing the Company’s exposure to a market
decline than selling fixed income securities and purchasing a similar portfolio when such a decline is believed to
be over.
Growing and Protecting Your Wealth138