Freddie Mac 2008 Annual Report Download - page 113

As interest rates decreased, the fair value of our pay-fixed swap portfolio decreased by $40.3 billion in 2008. This was
partially offset by increases in the fair value of our receive-fixed swap portfolio of approximately $18.6 billion and our
purchased call swaption portfolio of $14.0 billion.
The fair value of the total derivative portfolio decreased in 2007 due to net interest rate decreases across the yield curve
that negatively impacted the fair value of our interest-rate swap portfolio. These fair values losses were partially offset by
fair value increases on our purchased call swaption derivative portfolio that resulted from a net increase in implied volatility
and net interest rate decreases.
As interest rates decreased, the fair value of our pay-fixed swap portfolio decreased by $10.1 billion in 2007. This was
partially offset by increases in the fair value of our receive-fixed swap portfolio of approximately $4.0 billion and our
purchased call swaption portfolio of $3.1 billion. In 2007, we added to our portfolio of purchased call swaptions to manage
convexity risk associated with the prepayment option in a decreasing interest rate environment. The notional amount of our
pay-fixed swap portfolio increased because we enter into forward-starting pay-fixed swaps to mitigate the duration risk
created when we enter into purchased call swaptions and to manage steepening yield curve effects on mortgage duration.
Table 39 summarizes the changes in derivative fair values.
Table 39 — Changes in Derivative Fair Values
2008
(1)
2007
(1)
(in millions)
Beginning balance, at January 1 — Net asset (liability) ............................................... $ 4,790 $ 7,720
Net change in:
Forward purchase and sale commitments ...................................................... (322) 321
Credit derivatives. . . ................................................................... 28 11
Swap guarantee derivatives . . . ............................................................ (7) (1)
Other derivatives:
(2)
Changes in fair value ................................................................... (13,806) (2,688)
Fair value of new contracts entered into during the period
(3)
......................................... 3,587 1,146
Contracts realized or otherwise settled during the period . . ......................................... 1,903 (1,719)
Ending balance, at December 31 — Net asset (liability) ............................................... $ (3,827) $ 4,790
(1) The value of derivatives on our consolidated balance sheets is reported as derivative assets, net and derivative liability, net, and includes derivative
interest receivable (payable), net, trade/settle receivable (payable), net and derivative cash collateral (held) posted, net. Refer to “CONSOLIDATED
RESULTS OF OPERATIONS — Table 15 — Summary of the Effect of Derivatives on Selected Consolidated Financial Statement Captions” for
reconciliation of fair value to the amounts presented on our consolidated balance sheets as of December 31, 2008 and December 31, 2007. Fair value
excludes derivative interest receivable, net of $2.3 billion, trade/settle receivable or (payable), net of $— billion and derivative cash collateral held, net
of $9.5 billion at January 1, 2007.
(2) Includes fair value changes for interest-rate swaps, option-based derivatives, futures, foreign-currency swaps and interest-rate caps.
(3) Consists primarily of cash premiums paid or received on options.
Table 40 provides information on our outstanding written and purchased swaption and option premiums at
December 31, 2008 and 2007, based on the original premium receipts or payments. We use written options primarily to
mitigate convexity risk and reduce our overall hedging costs. See “QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK — Interest-Rate Risk and Other Market Risks — Sources of Interest-Rate Risk and Other Market
Risks — Duration Risk and Convexity Risk” for further discussion related to convexity risk.
Table 40 — Outstanding Written and Purchased Swaption and Option Premiums
Original Premium
Amount (Paid)
Received
Original Weighted
Average Life to
Expiration
Remaining Weighted
Average Life
(dollars in millions)
Purchased:
(1)
At December 31, 2008 . . . ....................................... $(6,775) 7.6 years 6.2 years
At December 31, 2007 . . . ....................................... $(5,478) 7.8 years 6.0 years
Written:
(2)
At December 31, 2008 . . . ....................................... $ 186 2.9years 2.2 years
At December 31, 2007 . . . ....................................... $ 87 3.0years 2.6 years
(1) Purchased options exclude callable swaps.
(2) Excludes written options on guarantees of stated final maturity of Structured Securities.
Table 41 shows the fair value for each derivative type and the maturity profile of our derivative positions. A positive fair
value in Table 41 for each derivative type is the estimated amount, prior to netting by counterparty, that we would be entitled
to receive if we terminated the derivatives of that type. A negative fair value for a derivative type is the estimated amount,
prior to netting by counterparty, that we would owe if we terminated the derivatives of that type. See “CREDIT RISKS —
Institutional Credit Risk — Table 75 — Derivative Counterparty Credit Exposure” for additional information regarding
derivative counterparty credit exposure. Table 41 also provides the weighted average fixed rate of our pay-fixed and receive-
fixed swaps.
110 Freddie Mac