Bank of Montreal 1997 Annual Report Download - page 92

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Bank of Montreal 180th Annual Report 199786
As a financial institution we record trading assets at market values
and non-trading assets and liabilities at their original amortized cost.
Set out below is a comparison of the amounts which would be
reported if all of our financial instrument assets and liabilities were
reported at their fair value. Fair value is subjective in nature, requir-
ing
a variety of valuation techniques and assumptions. The values
are based upon the estimated amounts for individual assets and lia-
bilities and do not include an estimate of the fair value of any of our
legal entities or underlying operations that comprise our business.
For the most part, fair value amounts represent our estimate
of the amounts we could exchange the financial instruments
for with third parties who were interested in acquiring the instru-
ments. However, in some cases the financial instruments are
not typically exchanged and therefore it is difficult to determine
their fair value. In those cases, we have estimated fair value
assuming that we will not sell the assets or liabilities, taking into
account only changes in interest rates and credit risk that have
occurred since we acquired them or entered into a contract.
Interest rate sensitivity is the main cause of change in the fair
value of our financial instruments.
Note 21 Fair Value of Financial Instruments
1997 1996
Fair value Fair value Fair value Fair value Fair value Fair value
Book of assets and of ALM over (under) Book of assets and of ALM over (under)
value liabilities derivatives book value value liabilities derivatives book value
Assets
Cash resources $ 32,245 $ 32,245 $ (8) $ (8) $ 24,187 $ 24,187 $ 1 $ 1
Securities
(note 3)
41,789 42,243 1 455 36,609 36,980 (3) 368
Loans 114,918 115,674 90 846 98,413 99,495 268 1,350
Customers’ liability under acceptances 5,594 5,594 – – 4,397 4,397 – –
Other assets 11,234 11,234 – – 4,359 4,359 – –
205,780 206,990 83 1,293 167,965 169,418 266 1,719
Liabilities
Deposits 144,212 144,659 (76) 371 119,262 119,985 34 757
Acceptances 5,594 5,594 – – 4,397 4,397 – –
Securities sold but not yet purchased 10,304 10,304 – – 13,716 13,716 – –
Securities sold under repurchase agreements 21,389 21,389 – – 15,523 15,523 – –
Other liabilities 13,605 13,619 – 14 6,034 6,047 – 13
Subordinated debt 3,831 4,222 (18) 373 3,314 3,570 (44) 212
$ 198,935 $ 199,787 $ (94) $ 758 $ 162,246 $ 163,238 $ (10) $ 982
Total $ 535 $ 737
The following table provides the fair value of our derivative financial instruments portfolio which is represented by the sum of net
unrealized gains and losses, accrued interest receivable or payable, and premiums paid or received:
1997 1996
Customer/ Asset/
proprietary liability
Customer/proprietary trading Asset/liability management Total trading management Total
Gross Gross Gross Gross
assets liabilities Net assets liabilities Net Net Net Net Net
Interest Rate Contracts
Swaps $ 1,440 $ (1,531) $ (91) $ 572 $ (225) $ 347 $ 256 $ 20 $ 326 $ 346
Forward rate agreements 72 (50) 22 – – – 22 15 – 15
Futures 4(1) 3 – – – 3 (1) – (1)
Purchased options 182 – 182 11 – 11 193 104 3 107
Written options – (193) (193) – (26) (26) (219) (129) (13) (142)
Foreign Exchange Contracts
Cross-currency swaps 75 (18) 57 – – – 57 79 – 79
Cross-currency interest rate swaps 547 (652) (105) 2 (120) (118) (223) (18) (22) (40)
Forward foreign exchange contracts 3,490 (3,333) 157 152 (120) 32 189 (29) 15 (14)
Futures –––––––– – –
Purchased options 207 – 207 – – – 207 110 – 110
Written options – (155) (155) – – – (155) (110) – (110)
Commodity Contracts 265 (212) 53 – – – 53 4 – 4
Equity Contracts 15 (12) 3 4 (4) – 3 3 5 8
Total Fair Value $ 6,297 $ (6,157) $ 140 $ 741 $ (495) $ 246 $ 386 $ 48 $ 314 $ 362
Total Book Value $ 6,297 $ (6,157) $ 140 $ 358 $ (289) $ 69 $ 209 $ 48 $ 38 $ 86
Average Fair Value $ 7,238 $ (7,154) $ 84 $ 632 $ (353) $ 279 $ 363 $ 164 $ 76 $ 240
Fair values are calculated as:
•
Instruments are marked to market using quoted market rates and/or zero coupon
valuation techniques.
•
Zero coupon curves are created using generally accepted mathematical processes
from underlying instruments such as cash, bonds, futures and off-balance sheet prices
observable in the market.
•
Options volatilities are either obtained directly from market sources or implied from
market prices utilizing a modified Black Scholes Option Pricing algorithm.
•
All prices and rates used are independently validated to ensure consistency and accuracy.
Assets are shown net of liabilities to customers where we have an enforceable right to
offset amounts and we intend to settle contracts on a net basis.