Companies use hedging as their major weapon against the rising risk in business, market or interest rate related activities, but if it is not performed efficiently, then it can lead to a huge loss as well. The most recent case of such adverse effect of hedging was seen, with Federal Home Loan Mortgage Corp (OTCBB:FMCC). As per the reports, the company has suffered a huge decline in profit and net income due to interest rate hedging.
Insights on The Matter:
FMCC keep exercising interest rate hedging from time to time so that it can make use of the existing market condition to generate profit for its investors. The total amount that was at stake this time was close to $3.4 billion. Due to adverse market conditions, FMCC lost this amount, which not only affected its financial results for the quarter, but also for the entire year. Due to this unexpected loss, maximum part of FMCC’s profit was wiped out within no time.
The loss affected the company’s equity position as well. According to reports, FMCC’s equity capital has come down to $1.8 billion, the worst performance in the recent past. There are high probabilities now that FMCC may face losses in the future also. If it happens, then millions of dollars of taxpayers, which FMCC has, are no longer safe. Things will remain the same unless it finds out a way to handle this situation in a risk-free way.
FMCC’s net income in 3Q2013 was close to $2.1 billion, which came down to $227 million at the end of 4Q2014. It never witnessed as much as 90% reduction in the net income within a matter of 4 months. The reason for this unexpected loss was the sudden reduction in the interest rates. They were recorded as 2.4% at the starting of the October 2014, but came down to 2.17% at the end of December, 2014. Since then, the interest rates have been decreasing; therefore, Federal Home Loan Mortgage Corp (OTCBB:FMCC) will have to wait for the right time to take its next move.