Freddie Mac 2012 Annual Report Download - page 308

Under the third-party appraisal technique, we use the prices provided by third-party appraisers without adjustment. The
third-party appraisers consider the physical condition of the property and use comparable sales and other market data in
determining the appraised value.
Impaired multifamily mortgage loans held-for-investment are classified as Level 3 as significant inputs used in the fair
value measurement are unobservable.
Derivative Assets, Net and Derivative Liabilities, Net
Derivative assets and derivative liabilities consist of interest-rate swaps, option-based derivatives, and other derivatives,
such as exchange-traded futures, foreign-currency swaps, and certain forward purchase and sale commitments.
Interest-Rate Swaps
Interest-rate swaps consist of receive-fixed, pay-fixed, and basis swaps. The majority of our interest-rate swaps are
valued using a discounted cash flow technique. Under this technique, interest-rate swaps are valued by using the appropriate
yield curves to discount the expected cash flows of both the fixed and variable rate components of the swap contracts. The
significant inputs used in the fair value measurement of these derivatives are market-based interest rates. These derivatives
are classified as Level 2 as the significant inputs used in the fair value measurement are observable in active markets. Certain
interest rate swaps that are exchange traded are classified in Level 1.
Option-Based Derivatives
Option-based derivatives consist of interest rate caps, interest rate floors, call swaptions, and put swaptions. We value
the majority of our option-based derivatives using option-pricing models. Dealer-supplied interest rate volatility matrices are
a key input into these models. Within each matrix, prices are provided for a range of option terms, swap terms, and strikes.
Our models then interpolate to determine the volatility for each instrument and use that volatility as an input to the option-
pricing model. These derivatives are classified as Level 2 as the significant inputs used are observable in active markets.
Other Derivatives
Other derivatives consist of exchange-traded futures, foreign-currency swaps, and certain forward purchase and sale
commitments.
Exchange-traded futures are valued using quoted prices in active markets for identical assets or liabilities and are
classified as Level 1.
Foreign-currency swaps are valued using a discounted cash flow technique. Under this technique, foreign-currency
swaps are valued using yield curves derived from observable market data to calculate and discount the expected cash flows
for the swap contracts. The significant inputs used in the fair value measurement of these derivatives are market-based
interest rates and foreign currency exchange rates. These derivatives are classified as Level 2 as the significant inputs used in
the fair value measurement are observable in active markets.
Certain purchase and sale commitments are also considered to be derivatives and are valued using the same techniques
we use to value the underlying instruments we are committing to purchase or sell. These instruments generally have
observable market pricing and are classified as Level 2. Valuation techniques for commitments to purchase or sell investment
securities and to extinguish or issue debt securities of consolidated trusts are further discussed in “Investments in Securities.”
Valuation techniques for commitments to purchase single-family mortgage loans are further discussed in “Valuation
Techniques for Assets and Liabilities Not Measured at Fair Value in Our Consolidated Balance Sheets, but for Which the
Fair Value is Disclosed — Mortgage Loans.”
Other Assets and Other Liabilities
Other assets consist of our guarantee asset related to guarantees issued to unconsolidated securitization trusts and
mortgage servicing rights. Other liabilities, from time to time, consist of mortgage servicing rights.
Guarantee Asset
Our guarantee asset is primarily related to our multifamily guarantees. The multifamily guarantee asset is valued using a
discounted cash flow technique. Under this technique, the present value of future cash flows related to our management and
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