Notes to the consolidated financial statements of Aegon N.V.  Note 3 164 For private loans, fixed interest mortgage loans and other loans originated by the Group, the fair value used for disclosure purposes  is estimated by discounting expected future cash flows using a current market rate applicable to financial instruments with similar  yield and maturity characteristics. For fixed interest mortgage loans, the market rate is adjusted for expenses, prepayment rates, lapse  assumptions (unobservable inputs), liquidity and credit risk (market observable inputs). An increase in expense spread, prepayment  rates and/or prepayment assumptions, would decrease the fair value of the mortgage loan portfolio. The fair value of floating interest rate mortgage loans, policy loans and private placements used for disclosure purposes is assumed to  be approximated by their carrying amount, adjusted for changes in credit risk. Credit risk adjustments are based on market observable  credit spreads if available, or management’s estimate if not market observable. 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.  Some OTC derivatives are so called longevity derivatives. The payout of longevity derivatives is linked to publicly available mortality  tables. The derivatives are measured using the present value of the best estimate of expected payouts of the derivative plus a risk  margin. The best estimate of expected payouts is determined using best estimate of mortality developments. Aegon determined  the risk margin by stressing the best estimate mortality developments to quantify the risk and applying a cost-of-capital methodology.  The most significant unobservable input for these derivatives is the (projected) mortality development. 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. Changes  in the fair value of derivatives attributable to changes in counterparty credit risk were not significant. Certain bifurcated 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, United Kingdom and Japan which are offered on  some 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 Japan, and  guaranteed minimum accumulation benefits on segregated funds sold in Canada. Since the price of these guarantees is not quoted in any market, 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  Annual Report 2013 Embedded derivatives in insurance contracts including guarantees Mortgage loans, policy loans and private loans  (held at amortized cost) Money market and other short-term investments and deposits with financial institutions  Derivatives 