Derivative Instruments and Hedging Activities

The Company enters into derivative instruments in connection with its risk management activities. These derivative instruments may include interest rate swaps, swaptions, futures and options on futures. The Company may also purchase or sell TBAs, purchase options on U.S. Treasury futures or invest in other types of mortgage derivative securities. The Company's derivative instruments are currently comprised of interest rate swaps, which are designated as trading instruments.

Derivatives Not Designated as Hedging Instruments

The following table presents the fair value of derivative instruments and their location in our consolidated balance sheets at December 31, 2018 and December 31, 2017, respectively (dollar amounts in thousands):



Type of Derivative Instrument	Balance Sheet Location	December 31, 2018		December 31, 2017
Interest rate swaps⁽¹⁾	Derivative assets	$	10,263	$	10,101


⁽¹⁾	Variation margin receivable of $8.5 million and $9.3 million is included as an adjustment to the carrying value of the derivative assets at December 31, 2018 and December 31, 2017, respectively.

The tables below summarize the activity of derivative instruments not designated as hedges for the years ended December 31, 2018 and 2017, respectively (dollar amounts in thousands).



	Notional Amount For the Year Ended December 31, 2018
	December 31, 2017		Additions		Settlement, Expiration or Exercise		December 31, 2018
Interest rate swaps	$	345,500	$	150,000	$	—	$	495,500



	Notional Amount For the Year Ended December 31, 2017
	December 31, 2016			Additions		Settlement, Expiration or Exercise			December 31, 2017
TBA securities ⁽¹⁾	$	149,000		$	1,881,000	$	(2,030,000	)	$	—
U.S. Treasury futures	17,100			129,100		(146,200		)	—
Interest rate swap futures	(151,700		)	500,700		(349,000		)	—
Eurodollar futures	(2,575,000		)	7,819,000		(5,244,000		)	—
Options on U.S. Treasury futures	—			5,000		(5,000		)	—
Swaptions	154,000			—		(154,000		)	—
Interest rate swaps	15,000			345,500		(15,000		)	345,500


⁽¹⁾	Open TBA purchases and sales involving the same counterparty, same underlying deliverable and the same settlement date are reflected in our consolidated financial statements on a net basis.

The following table presents the components of realized and unrealized gains and losses related to our derivative instruments that were not designated as hedging instruments included in other income category in our consolidated statements of operations for the years ended December 31, 2018, 2017 and 2016:



	Years Ended December 31,
	2018				2017						2016
	Realized Gains (Losses)		Unrealized Gains (Losses)		Realized Gains (Losses)			Unrealized Gains (Losses)			Realized Gains (Losses)			Unrealized Gains (Losses)
TBA	$	—	$	—	$	2,511		$	(141	)	$	3,998		$	534
Eurodollar futures	—		—		1,379			(1,175		)	(3,202		)	2,417
Interest rate swaps	—		909		(218		)	1,231			—			(126		)
Swaptions	—		—		—			274			—			568
U.S. Treasury and interest rate swap futures and options	—		—		267			(337		)	(2,040		)	(336		)
Total	$	—	$	909	$	3,939		$	(148	)	$	(1,244	)	$	3,057

Derivatives Designated as Hedging Instruments

As of December 31, 2018 and December 31, 2017, there were no derivative instruments designated as hedging instruments. Certain of the Company’s interest rate swaps outstanding during the years ended December 31, 2017 and December 31, 2016 to hedge the variable cash flows associated with borrowings made under our variable rate borrowings were designated as cash flow hedges. There were no costs incurred at the inception of these interest rate swaps, under which the Company agreed to pay a fixed rate of interest and receive a variable interest rate based on one month LIBOR, on the notional amount of the interest rate swaps. As of October 31, 2017, there were no outstanding derivatives designated as cash flow hedges.

The Company documents its risk-management policies, including objectives and strategies, as they relate to its hedging activities, and upon entering into hedging transactions, documents the relationship between the hedging instrument and the hedged liability contemporaneously. The Company assesses, both at inception of a hedge and on an on-going basis, whether or not the hedge is “highly effective” when using the matched term basis.

The Company discontinues hedge accounting on a prospective basis and recognizes changes in the fair value through earnings when: (i) it is determined that the derivative is no longer effective in offsetting cash flows of a hedged item (including forecasted transactions); (ii) it is no longer probable that the forecasted transaction will occur; or (iii) it is determined that designating the derivative as a hedge is no longer appropriate. The Company’s derivative instruments are carried on the Company’s balance sheets at fair value, as assets, if their fair value is positive, or as liabilities, if their fair value is negative. For the Company’s derivative instruments that are designated as “cash flow hedges,” changes in their fair value are recorded in accumulated other comprehensive income (loss), provided that the hedges are effective. A change in fair value for any ineffective amount of the Company’s derivative instruments would be recognized in earnings. The Company did not recognize any change in the value of its derivative instruments designated as cash flow hedges through earnings as a result of ineffectiveness of any of its hedges.

The following table presents the impact of the Company’s interest rate swaps designated as hedging instruments on the Company’s accumulated other comprehensive income (loss) for the years ended December 31, 2017 and December 31, 2016 (dollar amounts in thousands):



	Years Ended December 31,
	2017			2016
Accumulated other comprehensive income (loss) for derivative instruments:
Balance at beginning of the period	$	102		$	304
Unrealized loss on interest rate swaps	(102		)	(202		)
Balance at end of the period	$	—		$	102

The following table details the impact of the Company’s interest rate swaps designated as hedging instruments included in interest income or expense for the years ended December 31, 2017 and December 31, 2016, respectively (dollar amounts in thousands):



	Years Ended December 31,
	2017		2016
Interest Rate Swaps:
Interest income-investment securities	$	267	$	—
Interest expense-investment securities	—		743

Outstanding Derivatives

The following table presents information about our interest rate swaps whereby we receive floating rate payments in exchange for fixed rate payments as of December 31, 2018 and December 31, 2017, respectively (dollar amounts in thousands):



	December 31, 2018						December 31, 2017
Swap Maturities	Notional Amount		Weighted Average Fixed Interest Rate		Weighted Average Variable Interest Rate		Notional Amount		Weighted Average Fixed Interest Rate		Weighted Average Variable Interest Rate
2024	$	98,000	2.18	%	2.45	%	$	98,000	2.18	%	1.36	%
2027	247,500		2.39	%	2.53	%	247,500		2.39	%	1.39	%
2028	150,000		3.23	%	2.53	%	—		—		—
Total	$	495,500	2.60	%	2.52	%	$	345,500	2.33	%	1.38	%

The use of derivatives exposes the Company to counterparty credit risks in the event of a default by a counterparty. If a counterparty defaults under the applicable derivative agreement, the Company may be unable to collect payments to which it is entitled under its derivative agreements and may have difficulty collecting the assets it pledged as collateral against such derivatives. The Company has in place with all counterparties bi-lateral margin agreements requiring a party to post collateral to the Company for any valuation deficit. This arrangement is intended to limit the Company’s exposure to losses in the event of a counterparty default. Currently, all of the Company's interest rate swaps outstanding are cleared through CME Group Inc. ("CME Clearing") which is the parent company of the Chicago Mercantile Exchange Inc. CME Clearing serves as the counterparty to every cleared transaction, becoming the buyer to each seller and the seller to each buyer, limiting the credit risk by guaranteeing the financial performance of both parties and netting down exposures.