Freddie Mac 2011 Annual Report Download - page 268

typically enter into pay-fixed interest rate swaps or sell Treasury-based derivatives in order to lengthen the duration of our
funding to offset the increasing duration of our mortgage assets.
Foreign-Currency Exposure
We use foreign-currency swaps to eliminate virtually all of our exposure to fluctuations in exchange rates related to
our foreign-currency denominated debt by entering into swap transactions that effectively convert foreign-currency
denominated obligations into U.S. dollar-denominated obligations.
Types of Derivatives
We principally use the following types of derivatives:
• LIBOR- and Euribor-based interest-rate swaps;
• LIBOR- and Treasury-based options (including swaptions);
• LIBOR- and Treasury-based exchange-traded futures; and
• Foreign-currency swaps.
In addition to swaps, futures and purchased options, our derivative positions include the following:
Written Options and Swaptions
Written call and put swaptions are sold to counterparties allowing them the option to enter into receive- and pay-
fixed interest rate swaps, respectively. Written call and put options on mortgage-related securities give the counterparty
the right to execute a contract under specified terms, which generally occurs when we are in a liability position. We use
these written options and swaptions to manage convexity risk over a wide range of interest rates. Written options lower
our overall hedging costs, allow us to hedge the same economic risk we assume when selling guaranteed final maturity
REMICs with a more liquid instrument, and allow us to rebalance the options in our callable debt and REMICs portfolios.
We may, from time to time, write other derivative contracts such as caps, floors, interest-rate futures and options on
buy-up and buy-down commitments.
Commitments
We routinely enter into commitments that include: (a) our commitments to purchase and sell investments in
securities; (b) our commitments to purchase mortgage loans; and (c) our commitments to purchase and extinguish or issue
debt securities of our consolidated trusts. Most of these commitments are considered derivatives and therefore are subject
to the accounting guidance for derivatives and hedging.
Swap Guarantee Derivatives
In connection with some of the guarantee arrangements pertaining to multifamily housing revenue bonds and
multifamily pass-through certificates, we may also guarantee the sponsor’s or the borrower’s obligations as a counterparty
on any related interest-rate swaps used to mitigate interest-rate risk, which are accounted for as swap guarantee
derivatives.
Credit Derivatives
We entered into credit-risk sharing agreements for certain credit enhanced multifamily housing revenue bonds held
by third parties in exchange for a monthly fee. In addition, we have purchased mortgage loans containing debt
cancellation contracts, which provide for mortgage debt or payment cancellation for borrowers who experience
unanticipated losses of income dependent on a covered event. The rights and obligations under these agreements have
been assigned to the servicers. However, in the event the servicer does not perform as required by contract, under our
guarantee, we would be obligated to make the required contractual payments.
For a discussion of our significant accounting policies related to derivatives, please see “NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES — Derivatives.”
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