Sallie Mae 2010 Annual Report Download - page 180

15. Fair Value Measurements (Continued)
with us, we fully collateralize the exposure, minimizing the adjustment necessary to the derivative valuations
for our credit risk. While trusts that contain derivatives are not required to post collateral, when the
counterparty is exposed to the trust the credit quality and securitized nature of the trusts minimizes any
adjustments for the counterparty’s exposure to the trusts. The net credit risk adjustment (adjustments for our
exposure to counterparties net of adjustments for the counterparties’ exposure to us) decreased the valuations
by $72 million at December 31, 2010.
Inputs specific to each class of derivatives disclosed in the table below are as follows:
• Interest rate swaps — Derivatives are valued using standard derivative cash flow models. Derivatives
that swap fixed interest payments for LIBOR interest payments (or vice versa) and derivatives swapping
quarterly reset LIBOR for daily reset LIBOR were valued using the LIBOR swap yield curve which is
an observable input from an active market. These derivatives are level 2 fair value estimates in the
hierarchy. Other derivatives swapping LIBOR interest payments for another variable interest payment
(primarily T-Bill or Prime) or swapping interest payments based on the Consumer Price Index for
LIBOR interest payments are valued using the LIBOR swap yield curve and observable market spreads
for the specified index. The markets for these swaps are generally illiquid as indicated by a wide bid/
ask spread. The adjustment made for liquidity decreased the valuations by $129 million at December 31,
2010. These derivatives are level 3 fair value estimates.
• Cross-currency interest rate swaps — Derivatives are valued using standard derivative cash flow models.
Derivatives hedging foreign-denominated bonds are valued using the LIBOR swap yield curve (for both
USD and the respective currency), cross-currency basis spreads, and forward foreign currency exchange
rates. The derivatives are primarily British Pound Sterling and Euro denominated. These inputs are
observable inputs from active markets. Therefore, the resulting valuation is a level 2 fair value estimate.
Amortizing notional derivatives (derivatives whose notional amounts change based on changes in the
balance of, or pool of assets or debt) hedging trust debt use internally derived assumptions for the trust
assets’ prepayment speeds and default rates to model the notional amortization. Management makes
assumptions concerning the extension features of derivatives hedging rate-reset notes denominated in a
foreign currency. These inputs are not market observable; therefore, these derivatives are level 3 fair
value estimates.
• Floor Income Contracts — Derivatives are valued using an option pricing model. Inputs to the model
include the LIBOR swap yield curve and LIBOR interest rate volatilities. The inputs are observable
inputs in active markets and these derivatives are level 2 fair value estimates.
The carrying value of borrowings designated as the hedged item in a fair value hedge are adjusted for
changes in fair value due to benchmark interest rates and foreign-currency exchange rates. These valuations
are determined through standard bond pricing models and option models (when applicable) using the stated
terms of the borrowings, and observable yield curves, foreign currency exchange rates, and volatilities.
During 2008 and 2009, the bid/ask spread widened significantly for derivatives indexed to certain interest
rate indices as a result of market inactivity resulting in these instruments being classified as level 3 in the fair
value hierarchy. Additionally, significant unobservable inputs were used to model the amortizing notional of
some swaps tied to securitized asset balances and, as such, these derivatives have been classified as level 3 in
the fair value hierarchy. These swaps were transferred into level 3 during the first quarter of 2009 due to a
change in the assumption regarding successful remarketing and significant unobservable inputs used to model
notional amortizations.
F-77
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)