Fannie Mae 2007 Annual Report Download - page 167

not specify certain characteristics, such as specifying an “out-of-the-money” option, which could allow us to
more closely match the interest rate risk being hedged. We use option-based derivatives, such as swaptions,
because they provide the added flexibility to fully specify the terms of the option, thereby allowing us to more
closely match the interest rate risk being hedged.
(3) To quickly and efficiently rebalance our portfolio.
While we have a number of rebalancing tools available to us, it is often most efficient for us to rebalance our
portfolio by adding new derivatives or by terminating existing derivative positions. For example, when interest
rates fall and mortgage durations shorten, we can shorten the duration of our debt by entering into receive-
fixed interest rate swaps that convert longer-duration, fixed-term debt into shorter-duration, floating-rate debt
or by terminating existing pay-fixed interest rate swaps. This use of derivatives helps increase our funding
flexibility while helping us maintain our interest rate risk within policy limits. The types of derivative
instruments we use most often to rebalance our portfolio include pay-fixed and receive-fixed interest rate
swaps.
(4) To hedge foreign currency exposure.
We occasionally issue debt in a foreign currency. Our foreign-denominated debt represents less than 1% of our
total debt outstanding. Because all of our assets are denominated in U.S. dollars, we enter into currency swaps
to effectively convert the foreign-denominated debt into U.S. dollar-denominated debt. We are able to
minimize our exposure to currency risk by swapping out of foreign currencies completely at the time of the
debt issue.
Decisions regarding the repositioning of our derivatives portfolio are based upon current assessments of our
interest rate risk profile and economic conditions, including the composition of our consolidated balance
sheets and relative mix of our debt and derivative positions, the interest rate environment and expected trends.
Table 48 presents, by derivative instrument type, our risk management derivative activity for the years ended
December 31, 2007 and 2006, along with the stated maturities of derivatives outstanding as of December 31,
2007.
Table 48: Activity and Maturity Data for Risk Management Derivatives
(1)
Pay-Fixed
(2)
Receive-
Fixed
(3)
Basis
(4)
Foreign
Currency Pay-Fixed
Receive-
Fixed
Interest
Rate Caps Other
(5)
Total
Interest Rate Swaps
Interest Rate
Swaptions
(Dollars in millions)
Notional balance as of
December 31, 2005 ...... $188,787 $ 123,907 $ 4,000 $ 5,645 $149,405 $138,595 $ 33,000 $ 776 $ 644,115
Additions ............ 132,411 176,870 3,350 3,870 783 255 — 2,852 320,391
Terminations
(6)
........ (53,130) (53,693) (6,400) (4,964) (54,838) (23,929) (19,000) (3,159) (219,113)
Notional balance as of
December 31, 2006 ...... $268,068 $ 247,084 $ 950 $ 4,551 $ 95,350 $114,921 $ 14,000 $ 469 $ 745,393
Additions ............ 212,798 175,358 7,951 980 4,328 27,416 100 401 429,332
Terminations
(6)
........ (103,128) (136,557) (1,900) (2,972) (13,948) (17,686) (11,850) (220) (288,261)
Notional balance as of
December 31, 2007 ...... $377,738 $ 285,885 $ 7,001 $ 2,559 $ 85,730 $124,651 $ 2,250 $ 650 $ 886,464
Future maturities of notional
amounts:
(7)
Less than 1 year ........ $ 14,005 $ 68,495 $ — $ 1,199 $ 7,750 $ 19,700 $ 1,500 $ 20 $ 112,669
1 year to 5 years ....... 180,496 136,182 25 518 41,130 28,981 750 287 388,369
5 years to 10 years ...... 152,895 70,543 6,050 — 32,350 64,620 — 343 326,801
Over 10 years ......... 30,342 10,665 926 842 4,500 11,350 — — 58,625
Total ............. $377,738 $ 285,885 $ 7,001 $ 2,559 $ 85,730 $124,651 $ 2,250 $ 650 $ 886,464
Weighted-average interest rate
as of December 31, 2007:
Pay rate ............. 5.10% 5.04% 4.92% — 6.25% — — —
Receive rate .......... 5.03% 5.08% 6.84% — — 4.84% — —
Other............... — — — — — — 4.35% —
Weighted-average interest rate
as of December 31, 2006:
Pay rate ............. 5.10% 5.35% 5.29% — 6.18% — — —
Receive rate .......... 5.36% 5.01% 6.58% — — 4.92% — —
Other............... — — — — — — 3.55% —
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