Financial Derivatives

6 Months Ended

Jun. 30, 2011

4. Financial Derivatives

Gains and losses on the Company's derivative contracts for the three and six month periods ended June 30, 2011 are summarized in the tables below:

June 30, 2011:


Derivative Type	Primary Risk Exposure	Net Realized Gain/(Loss) for the Three Month Period Ended June 30, 2011			Change in Net Unrealized Gain/(Loss) for the Three Month Period Ended June 30, 2011			Net Realized Gain/(Loss) for the Six Month Period Ended June 30, 2011			Change in Net Unrealized Gain/(Loss) for the Six Month Period Ended June 30, 2011
Financial derivatives - assets
Credit Default Swaps on Asset Backed Securities	Credit	$	2,627,724		$	(1,489,653	)	$	5,308,298		$	(4,740,333	)
Credit Default Swaps on Asset Backed Indices	Credit		3,819,732			1,095,929			(1,225,909	)		1,974,050
Interest Rate Swaps	Interest Rates		(384,944	)		(1,637,426	)		(652,031	)		(835,100	)

			6,062,512			(2,031,150	)		3,430,358			(3,601,383	)

Financial derivatives - liabilities
Credit Default Swaps on Asset Backed Indices	Credit		2,441,507			(207,888	)		8,862,730			(217,059	)
Credit Default Swaps on Corporate Bond Indices	Credit		(49,797	)		339			(99,594	)		(34,277	)
Interest Rate Swaps	Interest Rates		(1,001,524	)		(3,141,303	)		(1,001,524	)		(3,690,252	)

			1,390,186			(3,348,852	)		7,761,612			(3,941,588	)

Futures contracts
Short Eurodollar contracts	Interest Rates		(347,432	)		202,288			(718,908	)		521,138

Total		$	7,105,266		$	(5,177,714	)	$	10,473,062		$	(7,021,833	)

Gains and losses on the Company's derivative contracts for the three and six month periods ended June 30, 2010 are summarized in the tables below:

June 30, 2010:


Derivative Type	Primary Risk Exposure	Net Realized Gain/(Loss) for the Three Month Period Ended June 30, 2010			Change in Net Unrealized Gain/(Loss) for the Three Month Period Ended June 30, 2010			Net Realized Gain/(Loss) for the Six Month Period Ended June 30, 2010			Change in Net Unrealized Gain/(Loss) for the Six Month Period Ended June 30, 2010
Financial derivatives - assets
Credit Default Swaps on Asset Backed Securities	Credit	$	3,365,728		$	(6,216,478	)	$	11,470,519		$	(15,155,697	)
Credit Default Swaps on Asset Backed Indices	Credit		(2,827,979	)		634,325			(4,292,659	)		1,657,183
Credit Default Swaps on Corporate Bond Indices	Credit		2,189			(1,395	)		2,189			(1,395	)
Credit Default Swaps on Corporate Bonds	Credit		(4,560,582	)		803,011			(2,281,392	)		(2,650,145	)
Other Swaps	Credit		335,312			(323,021	)		335,312			(257,212	)
Interest Rate Swaps	Interest Rates		(125,261	)		—			(125,261	)		(109,332	)

			(3,810,593	)		(5,103,558	)		5,108,708			(16,516,598	)

Financial derivatives - liabilities
Credit Default Swaps on Asset Backed Securities	Credit		(1,086,884	)		2,689,816			(1,657,578	)		3,881,292
Credit Default Swaps on Asset Backed Indices	Credit		6,216,783			(539,333	)		6,523,782			(265,095	)
Credit Default Swaps on Corporate Bond Indices	Credit		(929,642	)		1,283,806			(1,003,740	)		1,145,978
Total Return Swaps	Equity Market		(280,600	)		98,728			(853,876	)		87,798
Interest Rate Swaps	Interest Rates		(897,444	)		(1,084,866	)		(897,444	)		(1,214,536	)

			3,022,213			2,448,151			2,111,144			3,635,437

Futures contracts
Short Eurodollar contracts	Interest Rates		(288,200	)		(469,987	)		(1,025,880	)		(1,348,675	)

Total		$	(1,076,580	)	$	(3,125,394	)	$	6,193,972		$	(14,229,836	)

As of June 30, 2011, the Company is party to credit derivatives contracts in the form of credit default swaps on mortgage/asset backed securities and indices, or "ABSCDS." As a seller of credit protection via ABSCDS, the Company receives periodic payments from protection buyers, and is obligated to make payments to the protection buyer upon the occurrence of a "credit event" with respect to underlying reference assets. Written credit derivatives held by the Company at June 30, 2011 and December 31, 2010, respectively, are summarized below:


Single Name and Index Credit Default Swaps (Asset Backed Securities)	Amount at June 30, 2011			Amount at December 31, 2010
Fair Value of Written Credit Derivatives, Net	$	(4,564,225	)	$	(14,375,074	)
Fair Value of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties⁽¹⁾	$	5,031,909		$	18,286,216
Notional Amount of Written Credit Derivatives⁽²⁾	$	(24,864,649	)	$	(111,717,136	)
Notional Amount of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties⁽¹⁾	$	13,314,333		$	43,721,319

⁽¹⁾	Offsetting transactions with third parties include purchased credit derivatives which have the same reference obligation.

⁽²⁾

The notional amount is the maximum amount that a seller of ABSCDS would be obligated to pay, and a buyer of credit protection would receive upon occurrence of a "credit event." Movements in the value of credit default swap transactions may require the Company or the counterparty to post or receive collateral. Amounts due or owed under an ABSCDS contract may be offset against amounts due or owed on other ABSCDS contracts with the same ISDA counterparty.

Unless terminated by mutual agreement by both the buyer and seller, ABSCDS contracts typically terminate at the earlier of the (i) date the buyer of protection delivers the reference asset to the seller in exchange for payment of the notional balance following the occurrence of a credit event or (ii) date the reference asset is paid off in full, retired, or otherwise ceases to exist. Implied credit spreads may be used to determine the market value of swap contracts and are reflective of the cost of buying/selling protection. Higher spreads would indicate a greater likelihood that a seller will be obligated to perform (i.e., make payment) under the swap contract. In situations where the credit quality of an underlying reference asset has deteriorated, credit spreads combined with a percentage of notional amounts paid up front (points up front) are frequently used as an indication of ABSCDS risk. ABSCDS credit protection sellers entering the market would expect to be paid a percentage of the current notional balance up front (points up front) approximately equal to the fair value of the contract in order to write protection on the reference assets underlying the Company's ABSCDS contracts. Stated spreads at June 30, 2011 on ABSCDS contracts where the Company wrote protection range between 9 and 442 basis points on contracts that were outstanding at this date and were unchanged from December 31, 2010. However, participants entering the market at June 30, 2011 and December 31, 2010 would likely transact on similar contracts with material points upfront given these spreads. Total net up-front payments received relating to ABSCDS contracts outstanding at June 30, 2011 and December 31, 2010 were $4.2 million and $13.5 million, respectively.