Hedging is practiced to set off market risk and make money out of volatile conditions, but this move has gone wrong for Federal Home Loan Mortgage Corp (OTCBB:FMCC). Reports claim that the company has lost major part of its profit due to interest rate hedge. In total, the company lost around $3.4 billion, one of the highest lost amounts of all times.
Insights On The Matter:
The volatility of the financial market has hurt the company’s future perspectives. Reports claim that Freddie Mac’s equity capital has come down to a level which it cannot be proud of. The current equity capital of the company is not more than $1.8 billion. Experts call it a critical time for Freddie Mac is the market conditions don’t seem to get better for it in the near future. It will be a focal point as how Freddie Mac makes use of this situation.
If its loss amount doesn’t get reduced in the future, then it may have to suffer bigger problems as the taxpayers’ money is at stake. Things have changed drastically in the past few months for the company. It reported $2.1 billion net income in 3Q2014, but then the interest rates went down, which brought the net income of the company to $227 million, almost 90% reduction. The massive plunge in the net income didn’t only hurt its quarterly performance but wiped out a major share out of its yearly profit figures.
Freddie Mac prefers to invest the Treasury Bills with maturity period of 10 years or more. As per the reports, the interest rate of 10-Year Treasury bills was 2.4% in the starting of 4Q2014 (October 1, 2014). But it came down to 2.17% at the end of the three months period (December 31, 2014). The rate plunge within three months time wiped out almost $3.4 billion. Interest rates have been falling since then and haven’t improved yet.