The Federal Farm Credit Bureau (FFCB), based in Jersey City, NJ, is a major user of derivatives-no surprise, considering it serves a business in which the principal actors-farmers-routinely take long, hedged commodities positions on margin in a business with large fixed costs. FFCB, a government-sponsored enterprise not dissimilar to federally-chartered Fannie Mae, manages a portfolio with notational amounts of $23.6 billion at year-end 1996-$21 billion in interest rate swaps.

With such extensive, and often complex holdings, FFCB has been challenged to value options derived from its products. "We issue a lot of callable debt, and one of the things we need to do for our banks is value the option in the callable bond," says Bill Whitehead, FFCB's director of research. "They use that for their pricing, because if, say, they have a three-year loan with a pre-payment feature in it, they need to match off their assets and liabilities. This way they can call their debts if interest rates fall, and keep their balance sheet matched off."

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