Freddie Mac 2008 Annual Report Download - page 81

offset by gains of $30.2 billion on our receive-fixed swaps. Additionally, the decrease in forward swap interest rates during
2008, combined with an increase in implied volatility, resulted in a gain of $17.2 billion related to our purchased call
swaptions. In 2008, we responded to the declining availability of longer-term debt by maintaining our pay-fixed swap
position even though rates decreased. This resulted in a loss on our pay-fixed swap position, while the economically hedged
short-term debt did not have an offsetting gain in our current period statement of operations. For a further discussion related
to our debt issuances see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity — Debt Securities.”
During 2007, overall decreases in interest rates across the swap yield curve resulted in fair value losses on our interest-
rate swap derivative portfolio that were partially offset by fair value gains on our option-based derivative portfolio. Gains on
our option-based derivative portfolio resulted from an overall increase in implied volatility and decreasing interest rates. The
overall decline in interest rates resulted in a loss of $11.4 billion on our pay-fixed swaps that was only partially offset by a
$3.9 billion gain on our receive-fixed swap position. Gains on option-based derivatives, particularly purchased call swaptions,
increased in 2007 to $2.3 billion. We recognized a gain of $2.3 billion on our foreign-currency swaps as the Euro continued
to strengthen against the dollar. The gains on foreign-currency swaps offset a $2.3 billion loss on the translation of our
foreign-currency denominated debt, which is recorded in foreign-currency gains (losses), net.
During 2006, fair value losses on our swaptions increased as implied volatility declined and both long-term and short-
term swap interest rates increased. During 2006, fair value changes of our pay-fixed and receive-fixed swaps were driven by
increases in long-term swap interest rates.
Effective January 1, 2008, we elected the fair value option for our foreign-currency denominated debt. As a result of
this election, foreign-currency translation gains and losses and fair value adjustments related to our foreign-currency
denominated debt are recognized on our consolidated statements of operations as gains (losses) on foreign-currency
denominated debt recorded at fair value. Prior to January 1, 2008, translation gains and losses on our foreign-currency
denominated debt were recorded in foreign-currency gains (losses), net and the non-currency related changes in fair value
were not recognized. We use a combination of foreign-currency swaps and foreign-currency denominated receive-fixed swaps
to hedge the changes in fair value of our foreign-currency denominated debt related to fluctuations in exchange rates and
interest rates, respectively. For 2008, we recognized fair value gains of $406 million on our foreign-currency denominated
debt, made up of $710 million in translation gains offset by $(304) million related to interest-rate and instrument-specific
credit risk adjustments. Derivative gains (losses) on foreign-currency swaps were $(584) million, $2.3 billion and
$(92) million for 2008, 2007 and 2006, respectively. These amounts were offset by fair value gains (losses) related to
translation of $710 million, $(2.3) billion and $96 million for 2008, 2007 and 2006, respectively, on our foreign-currency
denominated debt. In addition, the derivative gains of $489 million for 2008 on foreign-currency denominated receive-fixed
swaps largely offset interest-rate and instrument-specific credit risk adjustments included in gains (losses) on foreign-
currency denominated debt recorded at fair value of $(304) million for 2008. For a discussion related to the instrument-
specific credit risk on our foreign-currency denominated debt see “NOTE 17: FAIR VALUE DISCLOSURES — Fair Value
Election — Foreign-Currency Denominated Debt with the Fair Value Option Elected” to our consolidated financial
statements. Prior to our election of the fair value option on our foreign-currency denominated debt, the fair value changes
attributable to interest rates of the derivative gains (losses) of $(335) million and $(254) million for 2007 and 2006,
respectively, on foreign-currency denominated receive-fixed swaps were not offset within our consolidated statements of
operations. See “Gains (Losses) on Foreign-Currency Denominated Debt Recorded at Fair Value” and “NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” to our consolidated financial statements for additional
information about our election to adopt the fair value option for foreign-currency denominated debt.
Gains (Losses) on Investment Activity
Gains (losses) on investment activity includes gains and losses on certain assets where changes in fair value are
recognized through earnings, gains and losses related to sales, impairments and other valuation adjustments. Table 18
summarizes the components of gains (losses) on investment activity.
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