Financial Derivatives

Gains and losses on the Company's derivative contracts for the three- and six-month periods ended June 30, 2018 and 2017 are summarized in the tables below:

Three- and Six-Month Periods Ended June 30, 2018:



		Three-Month Period Ended June 30, 2018						Six-Month Period Ended June 30, 2018
Derivative Type	Primary Risk Exposure	Net Realized Gain/(Loss)⁽¹⁾			Change in Net Unrealized Gain/(Loss)⁽²⁾			Net Realized Gain/(Loss)⁽¹⁾			Change in Net Unrealized Gain/(Loss)⁽²⁾
(In thousands)
Credit default swaps on asset-backed securities	Credit	$	161		$	(477	)	$	247		$	(549	)
Credit default swaps on asset-backed indices	Credit	(204		)	1			(2,046		)	1,453
Credit default swaps on corporate bond indices	Credit	(675		)	866			(2,237		)	2,428
Credit default swaps on corporate bonds	Credit	(1,472		)	3,063			2,996			(792		)
Total return swaps	Equity Market/Credit	257			(331		)	423			(313		)
Interest rate swaps	Interest Rate	(677		)	2,091			(1,500		)	7,130
Futures	Interest Rate/Currency	1,684			1,542			923			981
Forwards	Currency	1,104			100			(69		)	485
Options	Interest Rate/ Equity Market	(1		)	—			(62		)	76
Total		$	177		$	6,855		$	(1,325	)	$	10,899


(1)	Includes gain/(loss) on foreign currency transactions on derivatives in the amount of $22 thousand and $(0.2) million, for the three- and six-month periods ended June 30, 2018, which is included on the Consolidated Statement of Operations in Realized gain (loss) on foreign currency transactions.


(2)	Includes foreign currency translation on derivatives in the amount of $0.2 million and $0.3 million, for the three- and six-month periods ended June 30, 2018, which is included on the Consolidated Statement of Operations in Change in net unrealized gain (loss) on foreign currency translation.

Three- and Six-Month Periods Ended June 30, 2017:



		Three-Month Period Ended June 30, 2017						Six-Month Period Ended June 30, 2017
Derivative Type	Primary Risk Exposure	Net Realized Gain/(Loss)⁽¹⁾			Change in Net Unrealized Gain/(Loss)⁽²⁾			Net Realized Gain/(Loss)⁽¹⁾			Change in Net Unrealized Gain/(Loss)⁽²⁾
(In thousands)
Credit default swaps on asset-backed securities	Credit	$	312		$	(709	)	$	(97	)	$	259
Credit default swaps on asset-backed indices	Credit	(1,283		)	(488		)	(2,456		)	(2,610		)
Credit default swaps on corporate bond indices	Credit	(886		)	45			(1,172		)	18
Credit default swaps on corporate bonds	Credit	(548		)	(666		)	458			(995		)
Total return swaps	Equity Market/Credit	(603		)	10			(1,356		)	148
Interest rate swaps	Interest Rates	(834		)	(960		)	(580		)	(801		)
Futures	Interest Rates	(145		)	53			(178		)	37
Forwards	Currency	(2,523		)	(1,194		)	(3,345		)	(864		)
Warrants	Equity Market	—			—			(100		)	(6		)
Mortgage loan purchase commitments	Interest Rates	—			—			—			31
Options	Equity Market/Credit	(78		)	6			(149		)	17
Total		$	(6,588	)	$	(3,903	)	$	(8,975	)	$	(4,766	)


(1)	Includes gain/(loss) on foreign currency transactions on derivatives in the amount of $(19) thousand and $(3) thousand, for the three- and six-month periods ended June 30, 2017, which is included on the Consolidated Statement of Operations in Realized gain (loss) on foreign currency transactions.


(2)	Includes foreign currency translation on derivatives in the amount of $(90) thousand and $(126) thousand, for the three- and six-month periods ended June 30, 2017, which is included on the Consolidated Statement of Operations in Change in net unrealized gain (loss) on foreign currency translation.

The tables below detail the average notional values of the Company's financial derivatives, using absolute value of month end notional values, for the six-month period ended June 30, 2018 and the year ended December 31, 2017:



Derivative Type	Six-Month Period Ended June 30, 2018		Year Ended December 31, 2017
	(In thousands)
Interest rate swaps	$	1,113,420	$	1,306,853
Credit default swaps	601,794		531,008
Total return swaps	36,059		19,760
Futures	101,664		48,244
Options	124,741		94,415
Forwards	44,541		76,784
Warrants	—		378
Mortgage loan purchase commitments	—		1,585

From time to time the Company enters into credit derivative contracts for which the Company sells credit protection ("written credit derivatives"). As of both June 30, 2018 and December 31, 2017, all of the Company's open written credit derivatives were credit default swaps on either mortgage/asset-backed indices (ABX and CMBX indices) or corporate bond indices (CDX), collectively referred to as credit indices, or on individual corporate bonds, for which the Company receives periodic payments at fixed rates from credit protection buyers, and is obligated to make payments to the credit 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, 2018 and December 31, 2017, are summarized below:



Credit Derivatives	June 30, 2018			December 31, 2017
(In thousands)
Fair Value of Written Credit Derivatives, Net	$	(350	)	$	(4,770	)
Fair Value of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties ⁽¹⁾	286			(3,582		)
Notional Value of Written Credit Derivatives ⁽²⁾	150,542			177,588
Notional Value of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties ⁽¹⁾	(21,015		)	(88,400		)


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

(2)

The notional value is the maximum amount that a seller of credit protection 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 credit derivative contracts with an International Swaps and Derivatives Association, or "ISDA," counterparty may be offset against amounts due or owed on other credit derivative contracts with the same ISDA counterparty. As a result, the notional value of written credit derivatives involving a particular underlying reference asset or index has been reduced (but not below zero) by the notional value of any contracts where the Company has purchased credit protection on the same reference asset or index with the same ISDA counterparty.

A credit default swap on a credit index or a corporate bond typically terminates at the stated maturity date in the case of corporate indices or bonds, or, in the case of ABX and CMBX indices, the date that all of the reference assets underlying the index are paid off in full, retired, or otherwise cease to exist. Implied credit spreads may be used to determine the market value of such contracts and are reflective of the cost of buying/selling credit protection. Higher spreads would indicate a greater likelihood that a seller will be obligated to perform (i.e., make protection payments) under the contract. In situations where the credit quality of the underlying reference assets has deteriorated, the percentage of notional values that would be paid up front to enter into a new such contract ("points up front") is frequently used as an indication of credit risk. Credit protection sellers entering the market in such situations would expect to be paid points up front corresponding to the approximate fair value of the contract. For the Company's written credit derivatives that were outstanding at June 30, 2018, implied credit spreads on such contracts ranged between 36.4 and 1,387.9 basis points. For the Company's written credit derivatives that were outstanding at December 31, 2017, implied credit spreads on such contracts ranged between 15.4 and 1,945.7 basis points. Excluded from these spread ranges are contracts outstanding for which the individual spread is greater than 2,000 basis points. The Company believes that these contracts would be quoted based on estimated points up front. The total fair value of contracts with individual implied credit spreads in excess of 2,000 basis points was $(0.3) million and $(0.4) million as of June 30, 2018 and December 31, 2017, respectively. Estimated points up front on these contracts as of June 30, 2018 ranged between 51.9 and 72.0 points, and as of December 31, 2017 ranged between 51.4 and 71.6 points. Total net up-front payments (paid) or received relating to written credit derivatives outstanding at June 30, 2018 and December 31, 2017 were $(0.8) million and $(5.5) million, respectively.