Freddie Mac 2004 Annual Report Download - page 70

swaptions, which combined with the increase in the implied volatility of interest rates, resulted in a signiÑcant
increase in the value of the call swaptions. While increases in implied volatility also have a favorable eÅect on
the value of put swaptions, the decrease in fair value of the underlying pay-Ñxed interest-rate swaps due to the
decrease in interest rates resulted in a net decrease in the fair value of these swaptions during 2002.
Hedge Accounting Gains (Losses)
For those derivatives that are accounted for in a hedge accounting relationship, hedge accounting
ineÅectiveness generally arises when the fair value change of a derivative Ñnancial instrument does not exactly
oÅset the fair value change of the hedged item. Our hedge accounting relationships primarily consist of
derivatives linked to either existing debt in a fair value hedge accounting relationship or the variability of
interest payments on the forecasted issuances of debt securities in a cash Öow hedge accounting relationship.
Hedge accounting gains were $743 million, $644 million and $187 million in 2004, 2003 and 2002,
respectively. Hedge ineÅectiveness in these years related primarily to our fair value hedge accounting
relationships. Hedge accounting gains (losses) will vary from period to period based on the notional amount of
derivatives accounted for in hedge accounting relationships and the extent to which diÅerences in the
characteristics or terms of the derivative and the hedged item result in fair value or cash Öow changes that are
not exactly oÅset. For example, a signiÑcant portion of derivatives in our fair value hedges is forward starting
and valued using forward rates while the hedged debt is valued using spot rates. Therefore, the diÅerence
between the spot rate and the forward rate generally produces ineÅectiveness in these fair value hedges, which
is recognized in this caption.
Gains (Losses) on Investment Activity
Gains (losses) on investment activity include gains and losses on certain assets and liabilities marked to
fair value through earnings. Also included are gains and losses related to sales, impairments and other
valuation adjustments.
Table 28 summarizes the components of Gains (losses) on investment activity for 2004, 2003 and 2002.
Table 28 Ì Gains (Losses) on Investment Activity
Year Ended December 31,
2004 2003 2002
(dollars in millions)
Gains (losses) on trading securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,071) $(1,606) $ 921
Gains (losses) on PC residuals, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58 (144) (438)
Gains (losses) on sale of mortgage loans and available-for-sale securities(1) 793 1,551 1,958
Security impairments:
Mortgage-related interest-only security impairments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (66) (524) (568)
Other security impairments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (60) (212) (82)
Total security impairments(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (126) (736) (650)
Lower-of-cost-or-market valuation adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2) (179) 8
Total gains (losses) on investment activity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (348) $(1,114) $1,799
(1) We reclassiÑed $524 million for full year 2003 from Gains (losses) on sale of mortgage loans and available-for-sale securities to
Gains (losses) on trading securities to conform with the 2004 presentation.
(2) Includes impairments on securities classiÑed as available-for-sale and trading. Impairments relating to securities within the scope of
Emerging Issues Task Force Issue 99-20, ""Recognition of Interest Income and Impairment on Purchased and Retained BeneÑcial
Interests in Securitized Financial Assets,'' are calculated and recorded for both available-for-sale and trading securities.
Gains (Losses) on Trading Securities were ($1,071) million, ($1,606) million and $921 million in 2004,
2003 and 2002, respectively. Gains (losses) on securities we hold that are classiÑed for accounting purposes as
trading represent changes in the fair value of our trading positions, which include trading securities held,
certain forward commitments to purchase or sell trading securities, and Treasury and agency debt security
""short sale'' transactions (also referred to as ""securities sold, not yet purchased'') executed for asset/liability
management purposes. Historically, our trading positions arose primarily in connection with our Securities
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