Fannie Mae 2006 Annual Report Download - page 101

•Changes in our derivative activity: As interest rates change, we are likely to take actions to rebalance
our portfolio to manage our interest rate exposure. As interest rates decrease, expected mortgage
prepayments are likely to increase, which reduces the duration of our mortgage investments. In this
scenario, we generally will rebalance our existing portfolio to manage this risk by terminating pay-fixed
swaps or adding receive-fixed swaps, which shortens the duration of our liabilities. Conversely, when
interest rates increase and the duration of our mortgage assets increases, we are likely to rebalance our
existing portfolio by adding pay-fixed swaps that have the effect of extending the duration of our
liabilities. We also add derivatives in various interest rate environments to hedge the risk of incremental
mortgage purchases that we are not able to accomplish solely through our issuance of debt securities.
•Time value of purchased options: Intrinsic value and time value are the two primary components of an
option’s price. The intrinsic value is the amount that can be immediately realized by exercising the
option—the amount by which the market rate exceeds or is below the strike rate, such that the option is
in-the-money. The time value of an option is the amount by which the price of an option exceeds its
intrinsic value. As the remaining life of an option shortens due to the passage of time, the time value of
the option declines. We generally have recorded aggregate net fair value losses on our derivatives due to
the effect of the passage of time on the fair value of our purchased options.
Table 18 presents, by derivative instrument type, the estimated fair value of derivatives recorded in our
condensed consolidated balance sheets and the related outstanding notional amount as of December 31, 2006
and 2005.
Table 18: Notional and Fair Value of Derivatives
Notional
Amount
Estimated
Fair
Value
(1)
Notional
Amount
Estimated
Fair
Value
(1)
2006 2005
As of December 31,
(Dollars in millions)
Risk management derivatives:
Swaps:
Pay-fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $268,068 $(1,447) $188,787 $(2,954)
Receive-fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247,084 (615) 123,907 (1,301)
Basis swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950 (2) 4,000 (2)
Foreign currency swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,551 371 5,645 200
Swaptions:
Pay-fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,350 1,102 149,405 2,270
Receive-fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114,921 3,721 138,595 6,202
Interest rate caps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000 124 33,000 436
Other
(2)
............................................ 469 65 776 69
Risk management derivatives excluding accrued interest . . . . . . . . . . . . 745,393 3,319 644,115 4,920
Accrued interest receivable (payable) . . . . . . . . . . . . . . . . . . . . . . . . . — 406 — (548)
Total risk management derivatives . . . . . . . . . . . . . . . . . . . . . . . . $745,393 $ 3,725 $644,115 $ 4,372
Mortgage commitment derivatives:
Mortgage commitments to purchase whole loans . . . . . . . . . . . . . . . . $ 1,741 $ (6) $ 2,081 $ 6
Forward contracts to purchase mortgage-related securities . . . . . . . . . 16,556 (25) 17,993 62
Forward contracts to sell mortgage-related securities . . . . . . . . . . . . . 21,631 53 19,120 (66)
Total mortgage commitment derivatives . . . . . . . . . . . . . . . . . . . . $ 39,928 $ 22 $ 39,194 $ 2
(1)
Represents the net amount of “Derivative assets at fair value” and “Derivative liabilities at fair value” in the
consolidated balance sheets.
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