The market volatility has hit Federal Home Loan Mortgage Corp (OTCBB:FMCC) once again. As per the reports, Freddie Mac’s profit has faced a huge plunge due to interest rate hedging that it exercised lately.
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Freddie Mac is known for putting huge money in the capital market from time to time. Not only does it make big profits, but also get an edge over other rivals. Recently, it had put $3.4 billion on bet and exercised interest rate hedge, which didn’t go well. The entire money was lost, which not only affected its quarterly financial performance, but also wiped out a major part of its yearly profit.
The interest rate hedge has also affected its equity capital. According to reports, Freddie Mac’s equity capital has come down to $1.8 billion, which has enhanced the risk for shareholders. Experts call it a dangerous situation, especially for those taxpayers whose money has been parked with Freddie Mac. If the situation doesn’t improve, then the money of all the taxpayers will be at a huge risk in the future.
It performed extremely well in 3Q2014 and made full use of market conditions. The net profit of Freddie Mac in the third quarter was $2.1 billion, which came down to $ $227 million in 4Q2014. The plunge in net income was close to 90%, something Freddie Mac never witnessed in the past. It has always been exercising derivatives to generate income.
Freddie Mac has made huge money through this way many a times in the past, but its last move led it to the loss of $3.4 billion, which affected it deeply. It invested in the 10-Year Treasury bills, which had interest rate of 2.4% on October 1, 2014. At the end of the December, the interest rate dropped down to 2.17%. It has been going down since then. If the situation doesn’t elevate in the near future, then financial results of Freddie Mac may go worse.