Prudential 2007 Annual Report Download - page 169

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PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
19. DERIVATIVE INSTRUMENTS (continued)
As further described in Note 9, the Company sells variable annuity products, which contain embedded derivatives. These embedded
derivatives are marked to market through “Realized investment gains (losses), net” based on the change in value of the underlying
contractual guarantees, which are determined using valuation models. The Company maintains a portfolio of derivative instruments that is
intended to economically hedge the risks related to the above products’ features. The derivatives may include, but are not limited to equity
options, total return swaps, interest rate swap options, caps, floors, and other instruments. In addition, some variable annuity products
feature an automatic rebalancing element to minimize risks inherent in our guarantees.
The Company invests in fixed maturities that, in addition to a stated coupon, provide a return based upon the results of an underlying
portfolio of fixed income investments and related investment activity. The Company accounts for these investments as available for sale
fixed maturities containing embedded derivatives. Such embedded derivatives are marked to market through “Realized investment gains
(losses), net,” based upon the change in value of the underlying portfolio.
The table below provides a summary of the notional amount and fair value of derivatives contracts, excluding embedded derivatives,
by the primary underlying. Many derivative instruments contain multiple underlyings.
December 31,
2007
December 31,
2006
Gross
Notional
Fair
Value
Gross
Notional
Fair
Value
(in millions)
Interest rate .................................................................. $55,297 $ (36) $40,814 $ (25)
Credit ....................................................................... 2,833 (72) 1,775 14
Currency .................................................................... 14,943 (342) 12,286 (188)
Equity ....................................................................... 4,615 617 2,876 230
Total ........................................................................ $77,688 $ 167 $57,751 $ 31
Cash Flow, Fair Value and Net Investment Hedges
The primary derivative instruments used by the Company in its fair value, cash flow, and net investment hedge accounting
relationships are interest rate swaps, currency swaps and currency forwards. As noted above, these instruments are only designated for
hedge accounting in instances where the appropriate criteria are met. The Company does not use futures, options, credit, equity or
embedded derivatives in any of its fair value, cash flow or net investment hedge accounting relationships.
The table below provides a summary of notional amount and fair value, excluding embedded derivatives, by type of hedge
designation:
December 31, 2007 December 31, 2006
Gross
Notional
Fair
Value
Gross
Notional
Fair
Value
(in millions)
Fair value ............................................................ $ 8,900 $(210) $ 8,643 $ (32)
Cash flow ............................................................ 2,634 (390) 2,705 (268)
Net investment hedges .................................................. 1,999 8 1,538 (2)
Non-qualifying ........................................................ 64,155 759 44,865 333
Total ................................................................ $77,688 $ 167 $57,751 $ 31
Prudential Financial 2007 Annual Report 167