Sallie Mae 2006 Annual Report Download - page 166

10. Derivative Financial Instruments (Continued)
Company’s basis swaps hedge variable interest rate risk, however they generally do not meet this effectiveness
test because most of the Company’s FFELP student loans can earn at either a variable or a fixed interest rate
depending on market interest rates. The Company also has basis swaps that do not meet the SFAS No. 133
effectiveness test that economically hedge off-balance sheet instruments. As a result, under GAAP these swaps
are recorded at fair value with changes in fair value reflected currently in the income statement.
In addition, the Company enters into equity forward contracts (see Note 14, “Stockholders’ Equity,” for a
further discussion of equity forward contracts). The Company utilizes the strategy to minimize exposure to
fluctuations in the Company’s stock price and to better manage the cost of its share repurchases. In order to
qualify as a hedge under SFAS No. 133, the hedged item must impact net income. In this case, the repurchase
of the Company’s shares does not impact net income, therefore, the equity forwards do not qualify as a
SFAS No. 133 hedge. The Company’s equity forward contracts provide for physical, net share or net cash
settlement options. In addition, the Company may be required to unwind portions or all of a contract if the
price of the Company’s common stock falls below a certain percentage of the strike price (usually between
50 percent and 65 percent) or if the Company’s credit rating falls below a pre-determined level. For equity
forward contracts in effect as of December 31, 2006, the initial trigger price ranged from approximately
$25.93 to $35.58 and the final trigger price ranged from $20.84 to $27.37.
F-47
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)