Company: FMCCN
Filing Date: 2025-02-13
Form Type: 10-K
Source: 0001026214-25-000040
Chunk: 99

Company: FEDERAL HOME LOAN MORTGAGE CORP
Filing Date: 2025-02-13
Form: 10-K
Item: Item 15
Chunk 99
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 used derivatives.

Table 44 - PVS-L Results Before Derivatives and After Derivatives(In millions) December 31, 2024December 31, 2023PVS-L (50 bps):Before derivatives$2,006 $1,261 After derivatives11 — Effect of derivatives(1,995)(1,261)

Spread Risk

Spread risk is the risk that yields in different asset classes may not move together and may adversely affect our economic value. This risk arises principally because interest rates on our mortgage-related investments may not move in tandem with interest rates on our financial liabilities and derivatives, potentially affecting the effectiveness of our hedges. We are exposed to the following types of market spread risk:

n    Market spread risk arising from mortgage-related investments, including loans and securities, and certain non-mortgage investments;

n    Market spread risk arising from our use of SOFR and Treasury-based instruments in our risk management activities; and 

n    Market spread risk arising from the difference in time between when we commit to purchase a mortgage loan through our pipeline path and when we either securitize or hedge the loan. During this time, market spreads can widen, causing losses due to changes in fair value.

Spread duration measures the percentage change in the price of financial instruments from a change in spread over the benchmark interest rates. Unlike effective duration, spread duration typically only impacts the discounting of an instrument’s cash flows, and not the underlying cash flows themselves. This discounting impact creates a measure that is typically positive, where the instrument increases in value as spreads decline and decreases in value as spreads widen.

Limitations of Interest-Rate Risk Measures

While we believe that PVS and duration gap are useful risk management tools, they should be understood as estimates rather than as precise measurements. Mis-estimation of economic market risk could result in over or under hedging of interest-rate risk, significant economic losses, and an adverse impact on earnings. The limitations of our economic market risk measures include the following:

n    Our PVS and duration gap estimates are determined using models that involve our judgment of interest-rate and prepayment assumptions.  

n    There could be times when we hedge differently than our model estimates during the period, such as when we are making changes or market updates to these models. 

n    PVS and duration gap do not capture the potential effect of certain other market risks, such as changes in volatility and market spread risk. The effect of these other market risks can be