Freddie Mac 2006 Annual Report Download - page 75

Table 35 Ì Derivative Impact on Portfolio Market Value Sensitivity
Before After EÅect of
Derivatives Derivatives Derivatives
At December 31, 2006
PMVS-L (50 bps)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2% 1% (1)%
At December 31, 2005
PMVS-L (50 bps)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2% 1% (1)%
Duration Gap Results. Our estimated average duration gap for the months of December 2006 and 2005 was zero
months.
The disclosure in our Monthly Volume Summary reports, which are available on our website at www.freddiemac.com,
reÖects the average of the daily PMVS-L, PMVS-YC and duration gap estimates for a given reporting period (a month,
quarter or year).
Use of Derivatives and Interest-Rate Risk Management
Use of Derivatives. We use derivatives primarily to:
‚ hedge forecasted issuances of debt and synthetically create callable and non-callable funding;
‚ regularly adjust or rebalance our funding mix in order to more closely match changes in the interest-rate
characteristics of our mortgage assets; and
‚ hedge foreign-currency exposure (see ""Sources of Interest-Rate Risk and Other Market Risks Ì Foreign-Currency
Risk.'')
Hedge Forecasted Debt Issuances and Create Synthetic Funding. We typically commit to purchase mortgage
investments on an opportunistic basis for a future settlement, typically ranging from two weeks to three months after the date
of the commitment. To facilitate larger and more predictable debt issuances that contribute to lower funding costs, we use
interest-rate derivatives to economically hedge the interest-rate risk exposure from the time we commit to purchase a
mortgage to the time the related debt is issued. We also use derivatives to synthetically create the substantive economic
equivalent of various debt funding structures. For example, the combination of a series of short-term debt issuances over a
deÑned longer-term period and a pay-Ñxed swap with the same maturity as the last issuance is the substantive economic
equivalent of a long-term Ñxed-rate debt instrument of comparable maturity. Similarly, the combination of non-callable debt
and a call swaption, or option to enter into a receive-Ñxed swap, with the same maturity as the non-callable debt, is the
substantive economic equivalent of callable debt. These derivatives strategies increase our funding Öexibility and allow us to
better match asset and liability cash Öows, often reducing overall funding costs.
Adjust Funding Mix. We generally use interest-rate swaps to mitigate contractual funding mismatches between our
assets and liabilities. We also use swaptions and other option-based derivatives to adjust the contractual funding of our debt
in response to changes in the expected lives of mortgage-related assets in the Retained portfolio. As market conditions
dictate, we take rebalancing actions to keep our interest-rate risk exposure within management-set limits. In a declining
interest-rate environment, we typically enter into receive-Ñxed swaps or purchase Treasury-based derivatives to shorten the
duration of our funding to oÅset the declining duration of our mortgage assets. In a rising interest-rate environment, we
typically enter into pay-Ñxed swaps or sell Treasury-based derivatives in order to lengthen the duration of our funding to
oÅset the increasing duration of our mortgage assets.
Types of Derivatives. The derivatives we use to hedge interest-rate and foreign-currency risk are common in the
Ñnancial markets. We principally use the following types of derivatives:
‚ LIBOR- and Euribor-based interest-rate swaps;
‚ LIBOR- and Treasury-based exchange-traded futures;
‚ LIBOR- and Treasury-based options (including swaptions); and
‚ Foreign-currency swaps.
In addition to swaps, futures and options, our derivative positions include the following:
Forward Purchase and Sale Commitments. We routinely enter into forward purchase and sale commitments for
mortgage loans and mortgage-related securities. Most of these commitments are derivatives subject to the requirements of
SFAS 133.
Swap Guarantee Derivatives. We guarantee the payment of principal and interest on (a) multifamily mortgage loans
that are originated and held by state and municipal housing Ñnance agencies to support tax-exempt multifamily housing
revenue bonds, (b) tax-exempt multifamily housing revenue bonds that support pass-through certiÑcates issued by third
parties and (c) Freddie Mac pass-through certiÑcates which are backed by tax-exempt multifamily housing revenue bonds
and related taxable bonds and/or loans. In connection with some of these guarantees, we may also guarantee the sponsor's or
63 Freddie Mac