111 ANNUAL REPORT 2010 Money market and other short term investments  and deposits with fi nancial institutions  Free standing fi nancial derivatives  Derivatives embedded in insurance contracts including  guarantees The fair value of assets maturing within a year is assumed to be  approximated by their carrying amount adjusted for credit risk  where appropriate. Credit risk adjustments are based on market  observable credit spreads if available, or management’s  estimate if not market observable.  Where quoted market prices are not available, other valuation  techniques, such as option pricing or stochastic modeling, are  applied. The valuation techniques incorporate all factors that  a typical market participant would consider and are based on  observable market data when available. Models are validated  before they are used and calibrated to ensure that outputs  reflect actual experience and comparable market prices.  Fair values for exchange-traded derivatives, principally futures  and certain options, are based on quoted market prices in  active markets. Fair values for over-the-counter (OTC)  derivative financial instruments represent amounts estimated  to be received from or paid to a third party in settlement of  these instruments. These derivatives are valued using pricing  models based on the net present value of estimated future  cash flows, directly observed prices from exchange-traded  derivatives, other OTC trades, or external pricing services.  Most valuations are derived from swap and volatility matrices,  which are constructed for applicable indices and currencies  using current market data from many industry standard  sources. Option pricing is based on industry standard valuation  models and current market levels, where applicable. The pricing  of complex or illiquid instruments is based on internal models  or an independent third party. For long-dated illiquid contracts,  extrapolation methods are applied to observed market data in  order to estimate inputs and assumptions that are not directly  observable. To value OTC derivatives, management uses  observed market information, other trades in the market and  dealer prices. AEGON normally mitigates counterparty credit risk in derivative  contracts by entering into collateral agreements where practical  and in ISDA master netting agreements for each of the Group’s  legal entities to facilitate AEGON’s right to offset credit risk  exposure. In the event no collateral is held by AEGON or the  counterparty, the fair value of derivatives is adjusted for credit  risk based on market observable spreads. Changes in the fair  value of derivatives attributable to changes in counterparty  credit risk were not significant.  Certain guarantees for minimum benefits in insurance and  investment contracts are carried at fair value. These guarantees  include guaranteed minimum withdrawal benefits (GMWB) in  the United States which are offered on some AEGON variable  annuity products and are also assumed from a ceding company;  minimum interest rate guarantees on insurance products  offered in The Netherlands, including group pension and  traditional products; Variable annuities sold in Europe; and  guaranteed minimum accumulation benefits on segregated  funds sold in Canada.  The fair values of these guarantees are calculated as the  present value of future expected payments to policyholders  less the present value of assessed rider fees attributable to the  guarantees. Given the complexity and long-term nature of these  guarantees which are unlike instruments available in financial  markets, their fair values are determined by using stochastic  techniques under a variety of market return scenarios. A variety  of factors are considered, including expected market rates of  return, equity and interest rate volatility, credit spread,  correlations of market returns, discount rates and actuarial  assumptions. The expected returns are based on risk-free rates. The credit  spread is set by using the credit default swap (CDS) spreads of  a reference portfolio of life insurance companies (including  AEGON), adjusted to reflect the subordination of senior debt  holders at the holding company level to the position of  policyholders at the operating company level (who have priority  in payments to other creditors). Because CDS spreads for  US life insurers differ significantly from that for European life  insurers, AEGON’s assumptions are set by region to reflect  these differences in the valuation of the guarantee embedded  in the insurance contracts. For equity volatility, AEGON uses a term structure assumption  with market-based implied volatility inputs for the first five  years and a long-term forward rate assumption of 25%  thereafter. The volume of observable option trading from which  volatilities are derived generally declines as the contracts’ term  increases, therefore, the volatility curve grades from implied  volatilities for five years to the ultimate rate. The resulting  volatility assumption in year 20 for the S&P 500 index  (expressed as a spot rate) was 24.8% at December 31, 2010  and 25.3% at December 31, 2009. Correlations of market  returns across underlying indices are based on historical  market returns and their inter-relationships over a number  of years preceding the valuation date. Assumptions regarding  policyholder behavior, such as lapses, included in the models  SHARPENING OUR FOCUS