Fannie Mae 2010 Annual Report Download - page 189

number of factors, such as cost, efficiency, the effect on our liquidity, results of operations, and our overall
interest rate risk management strategy.
The derivatives we use for interest rate risk management purposes fall into four broad categories:
•Interest rate swap contracts. An interest rate swap is a transaction between two parties in which each
agrees to exchange, or swap, interest payments. The interest payment amounts are tied to different interest
rates or indices for a specified period of time and are generally based on a notional amount of principal.
The types of interest rate swaps we use include pay-fixed swaps, receive-fixed swaps and basis swaps.
•Interest rate option contracts. These contracts primarily include pay-fixed swaptions, receive-fixed
swaptions, cancelable swaps and interest rate caps. A swaption is an option contract that allows us or a
counterparty to enter into a pay-fixed or receive-fixed swap at some point in the future.
•Foreign currency swaps. These swaps convert debt that we issue in foreign-denominated currencies into
U.S. dollars. We enter into foreign currency swaps only to the extent that we issue foreign currency debt.
•Futures. These are standardized exchange-traded contracts that either obligate a buyer to buy an asset at
a predetermined date and price or a seller to sell an asset at a predetermined date and price. The types of
futures contracts we enter into include Eurodollar, U.S. Treasury and swaps.
We use interest rate swaps, interest rate options and futures, in combination with our issuance of debt
securities, to better match the prepayment risk and duration of our assets with the duration of our liabilities.
We are generally an end user of derivatives; our principal purpose in using derivatives is to manage our
aggregate interest rate risk profile within prescribed risk parameters. We generally only use derivatives that are
relatively liquid and straightforward to value. We use derivatives for four primary purposes:
(1) As a substitute for notes and bonds that we issue in the debt markets;
(2) To achieve risk management objectives not obtainable with debt market securities;
(3) To quickly and efficiently rebalance our portfolio and
(4) To hedge foreign currency exposure.
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 52 presents, by derivative instrument type, our risk management derivative activity, excluding mortgage
commitments, for the years ended December 31, 2010 and 2009 along with the stated maturities of derivatives
outstanding as of December 31, 2010.
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