eTrade 2004 Annual Report Download - page 59

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Table of Contents
Index to Financial Statements
not limited to, instantaneous parallel shifts up 100, 200 and 300 basis points and down 100 basis points. The down 200 and 300 basis point
scenarios are not presented at December 31, 2004 and 2003, because they result in negative interest rates.
The sensitivity of NPVE at December 31, 2004 and 2003 and the limits established by the Bank’s Board of Directors are listed below
(dollars in thousands):
Under criteria published by the OTS, the Bank’s overall interest rate risk exposure at December 31, 2004 is characterized as “minimum.”
Derivative Financial Instruments
Change in NPVE
At December 31,
Board Limit
Parallel Change in Interest Rates (bps)
2004
2003
+300
$
(158,207
)
(9)%
$
(278,901
)
(26)%
(55)%
+200
$
(69,671
)
(4)%
$
(175,696
)
(16)%
(30)%
+100
$
(2,321
)
—
%
$
(
76,145
)
(7)%
(15)%
-
100
$
(149,651
)
(9)%
$
18,418
2%
(15)%
The Bank uses derivative financial instruments to help manage its interest rate risk. Interest rate swaps involve the exchange of fixed-rate
and variable-rate interest payments between two parties based on a contractual underlying notional amount, but do not involve the exchange of
the underlying notional amounts. Option products are utilized primarily to decrease the market value changes resulting from the prepayment
dynamics of the Bank’s mortgage portfolios, as well as to protect against increases in funding costs. The types of options the Bank employs are
primarily Cap Options (“Caps”) and Floor Options (“Floors”), “Payor Swaptions” and “Receiver Swaptions.” Caps mitigate the market risk
associated with increases in interest rates, while Floors mitigate the risk associated with decreases in market interest rates. Similarly, Payor and
Receiver Swaptions mitigate the market risk associated with the respective increases and decreases in interest rates.
Mortgage Production Activities
In the production of mortgage products, the Bank is exposed to interest rate risk between the commitment and funding dates of the loans.
There were $0.2 billion at December 31, 2004 and $0.3 billion at December 31, 2003, in mortgage loan commitments awaiting funding. The
associated interest rate risk results when the Bank enters into Interest Rate Lock Commitments (“IRLCs”), whereby determination of loan
interest rates occurs prior to funding. When the intent is to sell originated loans, the associated IRLCs are considered derivatives and,
accordingly, are recorded at fair value with associated changes recorded in earnings.
53