According to reports, Federal Home Loan Mortgage Corp (OTCBB:FMCC) has witnessed a huge decline in net income as well as profit in 4Q2014 as compared to the previous year. The reason for this decline is nothing but interest rate hedges performed by the company.
How Did Interest Rate Hedge Affected The Profitability:
As per reports, total loss to the company due to its interest rate hedges crossed a figure of $3.4 billion for the quarter, which elevated tensions of the management. Due to this below standard performance, maximum portion of company’s profit was set-off. Federal Home Loan Mortgage Corp (OTCBB:FMCC) suffered a huge decline in its equity capital as well, which had come down to $1.8 billion by the end of the previous quarter. It has not only weakened the current financial health of the company, but also enhanced the chances of future losses. If the company doesn’t take any step to secure tax-payers’ money, then it may have to face a lot more problems in the future.
If one take into consideration the reduction in the net income, then one get to know that the previous quarter was not good for Federal Home Loan Mortgage Corp (OTCBB:FMCC). The net income for FMCC in 4Q2014 was around $227 million compared to the $2.1 billion of the previous quarter. The reduction in net income is close to 90% quarter on quarter basis, which is something one doesn’t get to see normally. The interest rate hedging is considered as the sole reason for this huge drop in the net income.
What is Interest Rate Hedging:
Federal Home Loan Mortgage Corp (OTCBB:FMCC) is one of the oldest players in this field. One can make profit in interest rate hedging if interest rate increases. It witnessed many such quarters before 4Q2014 in which the interest rates rose; unfortunately they didn’t go up in the previous quarter.