DERIVATIVE INSTRUMENTS HEDGING AND NON-HEDGING ACTIVITIES

The Company enters into a variety of derivative instruments in connection with its risk management activities. The Company's primary objective for executing these derivatives and non-derivative instruments is to mitigate the Company's economic exposure to future events that are outside its control. The Company's derivative financial instruments are utilized principally to manage market risk and cash flow volatility associated with interest rate risk (including associated prepayment risk) related to certain assets and liabilities. As part of its risk management activities, the Company may, at times, enter into various forward contracts, including short securities, Agency to-be-announced securities, or TBAs, options, futures, swaps, swaptions and caps. In executing on the Company's current risk management strategy, the Company has entered into interest rate swaps, swaption agreements, TBA’s and futures contracts. Amounts receivable and payable under interest rate swap agreements are accounted for as unrealized gain (loss) on derivative contracts, net in the consolidated statement of operations. Premiums on swaptions are amortized on a straight line basis between trade date and expiration date and are recognized in the consolidated statement of operations as a realized loss on derivative contracts.

The following summarizes the Company's significant asset and liability derivatives, the risk exposure for these derivatives and the Company's risk management activities used to mitigate certain of these risks. While the Company uses derivative instruments to achieve the Company's risk management activities, it is possible that these instruments will not effectively mitigate all or a substantial portion of the Company's market rate risk. In addition, the Company might elect, at times, not to enter into certain hedging arrangements in order to maintain compliance with REIT requirements.

Balance Sheet Presentation

The following tables present the gross fair value and notional amounts of the Company’s derivative financial instruments as of December 31, 2017 and December 31, 2016.



	December 31, 2017
	Derivative Assets				Derivative Liabilities
	Contracts	Fair value		Notional	Contracts	Fair value		Notional
Eurodollar Futures	14,355	5,349,613		14,355,000,000	—	—		—
Total	14,355	$	5,349,613	14,355,000,000	—	$	—	—



	December 31, 2016
	Derivative Assets				Derivative Liabilities
	Contracts	Fair value		Notional	Contracts	Fair value		Notional
Eurodollar Futures	10,501	8,053,813		10,501,000,000	—	—		—
Total	10,501	$	8,053,813	10,501,000,000	—	$	—	—

Offsetting of Financial Assets and Liabilities

The Company’s repurchase agreements are governed by underlying agreements that provide for a right of setoff in the event of default of either counterparty to the agreement. The Company also has in place with its counterparties ISDA Master Agreements (“Master Agreements”) for its derivative contracts. In accordance with the Master Agreements with each counterparty, if on any date amounts would otherwise be payable in the same currency and in respect of the same transaction by each party to the other, then, on such date, each party’s obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, is replaced by an obligation upon the party by whom the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount. The Company has pledged financial collateral as restricted cash to its counterparties for its derivative contracts and repurchase agreements. See Note 2 for specific details on the terms of restricted cash with counterparties and Note 9 for the amounts of restricted cash outstanding.

Under GAAP, if the Company has a valid right of setoff, it may offset the related asset and liability and report the net amount. The Company presents repurchase agreements subject to Master Agreements or similar agreements on a gross basis, and derivative assets and liabilities subject to such arrangements on a net basis, based on derivative type and counterparty, in its consolidated balance sheets. Separately, the company presents cash collateral subject to such arrangements on a net basis, based on counterparty, in its consolidated balance sheets. However, the Company does not offset financial assets and liabilities with the associated cash collateral on its consolidated balance sheets.

The below tables provide a reconciliation of these assets and liabilities that are subject to Master Agreements or similar agreements and can be potentially offset on the Company’s consolidated balance sheets as of December 31, 2017 and December 31, 2016:



	December 31, 2017
							Gross amounts not offset in the Balance Sheet
Description	Gross amounts of recognized assets		Gross amounts offset in the Balance Sheet		Net amounts of assets presented in the Balance Sheet		Financial instruments		Cash collateral (Received)/ Pledged		Net amount
Futures	$	5,349,613	$	—	$	5,349,613	$	—	$	—	$	5,349,613
Total	$	5,349,613	$	—	$	5,349,613	$	—	$	—	$	5,349,613



	December 31, 2016
							Gross amounts not offset in the Balance Sheet
Description	Gross amounts of recognized assets		Gross amounts offset in the Balance Sheet		Net amounts of assets presented in the Balance Sheet		Financial instruments		Cash collateral (Received)/ Pledged		Net amount
Futures	$	8,053,813	$	—	$	8,053,813	$	—	$	—	$	8,053,813
Total	$	8,053,813	$	—	$	8,053,813	$	—	$	—	$	8,053,813



	December 31, 2017
									Gross amounts not offset in the Balance Sheet
Description	Gross amounts of recognized liabilities			Gross amounts offset in the Balance Sheet		Net amounts of liabilities presented in the Balance Sheet			Financial instruments		Cash collateral (Received)/ Pledged		Net amount
Repurchase agreements	$	(1,234,522,000	)	$	—	$	(1,234,522,000	)	$	—	$	—	$	(1,234,522,000	)
Total	$	(1,234,522,000	)	$	—	$	(1,234,522,000	)	$	—	$	—	$	(1,234,522,000	)



	December 31, 2016
									Gross amounts not offset in the Balance Sheet
Description	Gross amounts of recognized liabilities			Gross amounts offset in the Balance Sheet		Net amounts of liabilities presented in the Balance Sheet			Financial instruments		Cash collateral (Received)/ Pledged		Net amount
Repurchase agreements	$	(804,811,000	)	$	—	$	(804,811,000	)	$	—	$	—	$	(804,811,000	)
Total	$	(804,811,000	)	$	—	$	(804,811,000	)	$	—	$	—	$	(804,811,000	)

Income Statement Presentation

The Company has not applied hedge accounting to its current derivative portfolio held to mitigate the interest rate risk associated with its debt portfolio. As a result, the Company is subject to volatility in its earnings due to movement in the unrealized gains and losses associated with its futures, interest rate swaps, swaptions and any other derivative instruments.

The following table summarizes the underlying hedged risks and the amount of gains and losses on derivative instruments reported net in the consolidated statement of operations as realized gain (loss) on derivative contracts, net and unrealized gain (loss) on derivative contracts, net for the years ended December 31, 2017, December 31, 2016, and December 31, 2015:



	Year Ended December 31, 2017
Primary underlying risk	Amount of realized gain (loss)		Amount of unrealized appreciation (depreciation)			Total
Interest rate:
Futures	2,219,719		(2,704,413		)	(484,694		)
Total	$	2,219,719	$	(2,704,413	)	$	(484,694	)



	Year Ended December 31, 2016
Primary underlying risk	Amount of realized gain (loss)			Amount of unrealized appreciation (depreciation)		Total
Interest rate:
Futures	(3,089,001		)	5,495,463		2,406,462
Total	$	(3,089,001	)	$	5,495,463	$	2,406,462



	Year Ended December 31, 2015
Primary underlying risk	Amount of realized gain (loss)			Amount of unrealized appreciation (depreciation)		Total
Interest rate:
Interest rate swaps⁽¹⁾	$	(7,047,875	)	$	1,755,108	$	(5,292,767	)
Swaptions	(84,000		)	62,450		(21,550		)
Futures	(4,892,855		)	3,092,300		(1,800,555		)
Total	$	(12,024,730	)	$	4,909,858	$	(7,114,872	)

(1) In the year ended December 31, 2015, net swap interest expense totaled $2,216,417 comprised of $2,719,563 in interest expense paid (included in realized gain (loss)) and $503,146 in accrued interest income (included in unrealized gain (loss)).