Financial Derivatives

Gains and losses on the Company's derivative contracts for the years ended December 31, 2018 and 2017 are summarized in the tables below:

Years Ended December 31, 2018:



		Year Ended December 31, 2018
Derivative Type	Primary Risk Exposure	Net Realized Gain/(Loss)⁽¹⁾			Change in Net Unrealized Gain/(Loss)⁽²⁾
(In thousands)
Credit default swaps on asset-backed securities	Credit	$	(687	)	$	715
Credit default swaps on asset-backed indices	Credit	(2,293		)	2,013
Credit default swaps on corporate bond indices	Credit	(1,983		)	3,540
Credit default swaps on corporate bonds	Credit	2,993			(2,648		)
Total return swaps	Equity Market/Credit	3,844			(5		)
Interest rate swaps	Interest Rate	(985		)	3,648
Futures	Interest Rate/Currency	162			108
Forwards	Currency	923			359
Options	Interest Rate/ Equity Market	(63		)	77
Total		$	1,911		$	7,807


(1)	Includes gain/(loss) on foreign currency transactions on derivatives in the amount of $0.1 million for the year ended December 31, 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 $0.1 million for the year ended December 31, 2018, which is included on the Consolidated Statement of Operations in Change in net unrealized gain (loss) on foreign currency translation.

Year Ended December 31, 2017:



		Year Ended December 31, 2017
Derivative Type	Primary Risk Exposure	Net Realized Gain/(Loss)⁽¹⁾			Change in Net Unrealized Gain/(Loss)⁽²⁾
(In thousands)
Credit default swaps on asset-backed securities	Credit	$	(601	)	$	(263	)
Credit default swaps on asset-backed indices	Credit	(5,291		)	(817		)
Credit default swaps on corporate bond indices	Credit	(3,336		)	(459		)
Credit default swaps on corporate bonds	Credit	205			907
Total return swaps	Equity Market/Credit	(1,825		)	149
Interest rate swaps	Interest Rates	(1,171		)	571
Futures	Interest Rate/Currency	(195		)	(423		)
Forwards	Currency	(6,390		)	(18		)
Warrants	Equity Market	(100		)	(5		)
Mortgage loan purchase commitments	Interest Rates	—			31
Options	Credit/Interest Rate/Equity Market	—			10
Total		$	(18,704	)	$	(317	)


(1)	Includes gain/(loss) on foreign currency transactions on derivatives in the amount of $(0.1) million for the year ended December 31, 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 $(0.2) million for the year ended December 31, 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 years ended December 31, 2018 and 2017:



Derivative Type	Year Ended December 31, 2018		Year Ended December 31, 2017
	(In thousands)
Interest rate swaps	$	1,059,756	$	1,306,853
Credit default swaps	566,805		531,008
Total return swaps	53,603		19,760
Futures	201,295		48,244
Options	99,891		94,415
Forwards	45,522		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 December 31, 2018 and 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 December 31, 2018 and 2017, are summarized below:



Credit Derivatives	December 31, 2018			December 31, 2017
(In thousands)
Fair Value of Written Credit Derivatives, Net	$	(4,339	)	$	(4,770	)
Fair Value of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties ⁽¹⁾	(284		)	(3,582		)
Notional Value of Written Credit Derivatives ⁽²⁾	98,586			177,588
Notional Value of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties ⁽¹⁾	41,134			(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 December 31, 2018, implied credit spreads on such contracts ranged between 42.6 and 815.1 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 $(1.0) million and $(0.4) million as of December 31, 2018 and 2017, respectively. Estimated points up front on these contracts as of December 31, 2018 ranged between 36.9 and 75.2 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 December 31, 2018 and 2017 were $(2.0) million and $(5.5) million, respectively.