Question-and-Answer Session
Operator
We’ll go first to Bob Glasspiegel - Langen McAlenney.
Bob Glasspiegel - Langen McAlenney
I was wondering if you would be kind enough to just give us a little bit of a discussion on how your hedging has evolved and what you’re doing now that you didn’t used to do, whether there were any holes in as we’ve gone through volatile markets.
You mentioned hedging costs have gone up, which is certainly understandable. Are there refinements that you can do to offset the bigger hurdles that you’re facing? And finally just other things you can do to deal with FAS 133 that might mitigate this realized gains and loss element to it?
James Brannen
Maybe the second one is the easiest. We feel like that in terms of the SEC reporting requirements and FAS 133, we’re following to the letter of the law.
Bob Glasspiegel - Langen McAlenney
There’re some companies that are considering ?should we do uneconomic things to deal with FAS 133, pay something to mitigate it?’ You’ll just let the volatility fall as it may?
Donald Seibel
As Jim mentioned in his comments, one of the big drivers of the volatility is the risk free interest rate, and there are different ways to come up with risk free interest rate, spot curve, other metrics, and we currently use the Treasury spot to come up with those risk-free interest rates and we are challenging whether or not there’s another source that could provide us with less volatile results, and we’re talking to our auditors about different ways of doing the calculation to reduce the volatility reported, but we’re not pursuing anything from an economic perspective, it’s more from an accounting perspective.
James Brannen
And having said that that would be marginal relief. As interest rates move as fast as they’ve been moving recently, you would still see volatility in the FAS 133 results.
Bob Glasspiegel - Langen McAlenney
Got you.
James W. Noyce
As far as the hedging programs themselves, Bob, we really since we started the EquiTrust business have utilized static hedging and we hedge 100% of the risk with regards to the indexed annuities that we purchase through options. So, it’s 100% static hedging and that’s what we’ve done since the beginning.
We have been taking a look at dynamic hedging. I think we may have mentioned that in the past, but at this point have not moved in that direction.
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