Fannie Mae 2005 Annual Report Download - page 93

Table 11 provides additional detail on the estimated fair value of derivatives recorded in our consolidated
balance sheets and the related outstanding notional amount by derivative instrument type as of December 31,
2005 and 2004. We describe our risk management derivative activity in “Risk Management—Interest Rate
Risk Management and Other Market Risks.” We describe our credit exposure on our risk management
derivatives in “Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk
Management.”
Table 11: Notional and Fair Value of Derivatives
Notional
Amount
Estimated
Fair
Value
(1)
Notional
Amount
Estimated
Fair
Value
(1)
2005 2004
As of December 31,
(Dollars in millions)
Risk management derivatives:
Swaps:
Pay-fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $188,787 $(2,954) $142,017 $(6,687)
Receive-fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,907 (1,301) 81,193 479
Basis swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 (2) 32,273 7
Foreign currency swaps . . . . . . . . . . . . . . . . . . . . . . . . . . 5,645 200 11,453 686
Swaptions:
Pay-fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149,405 2,270 170,705 3,370
Receive-fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138,595 6,202 147,570 7,711
Interest rate caps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,000 436 104,150 638
Other
(2)
....................................... 776 69 733 84
Risk management derivatives excluding accrued interest . . . . . 644,115 4,920 690,094 6,288
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (548) — (856)
Total risk management derivatives. . . . . . . . . . . . . . . . . . . . . $644,115 $ 4,372 $690,094 $ 5,432
Mortgage commitment derivatives:
Mortgage commitments to purchase whole loans . . . . . . . . . $ 2,081 $ 6 $ 2,118 $ 4
Forward contracts to purchase mortgage-related securities . . 17,993 62 20,059 43
Forward contracts to sell mortgage-related securities . . . . . . 19,120 (66) 18,423 (35)
Total mortgage commitment derivatives . . . . . . . . . . . . . . . $ 39,194 $ 2 $ 40,600 $ 12
(1)
Represents the net amount of “Derivative assets at fair value” and “Derivative liabilities at fair value” in the consoli-
dated balance sheets.
(2)
Includes MBS options, swap credit enhancements, forward starting debt and the fair value of mortgage insurance con-
tracts that are accounted for as derivatives. These mortgage insurance contracts have payment provisions that are not
based on a notional amount.
As discussed above, because a significant portion of our derivatives consists of pay-fixed swaps, we expect the
aggregate estimated fair value of our derivatives to decline and result in derivatives losses when interest rates
decline because we are paying a higher fixed rate of interest relative to the current interest rate environment.
The $8.1 billion decrease in derivative losses in 2005 from 2004 was largely attributable to the increase in
interest rates during 2005, which increased the aggregate fair value of interest rate swaps and resulted in a
significant reduction in the net contractual interest expense recognized on our interest rate swaps. During
2005, we experienced a decrease in the fair value of our option-based derivatives primarily due to time decay
of these options and a decrease in implied volatility during 2005. Interest rates have generally trended up since
the end of 2005 and remained at overall higher levels through March 2007. As a result, we expect our
derivative losses in 2006 to be lower than 2005.
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