Bank of Montreal 1998 Annual Report Download - page 96

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As a financial institution we record trading assets at market values
and non-trading assets and liabilities at their original amortized
cost. Set out on the following page 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, requiring a variety of valuation techniques and assump-
tions. The values are based upon the estimated amounts for indi-
vidual assets and liabilities and do not include an estimate of the
fair value of any of our legal entities or underlying operations that
comprise our business.
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:
1998 19 97
Asset/
Customer liability
Customer 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 $ 3,352 $ (3,382) $ (30) $ 725 $ (586) $ 139 $ 109 $ (91) $ 347 $ 256
Forward rate agreements 103 (98) 5–––522 – 22
Futures 24 (2) 22 – – – 22 3–3
Purchased options 274 – 274 19 – 19 293 182 11 193
Written options – (251) (251) – (3) (3) (254) (193) (26) (219)
Foreign Exchange Contracts
Cross-currency swaps 191 (121) 70 – – – 70 57 – 57
Cross-currency
interest rate swaps 712 (1,559) (847) 6 (379) (373) (1,220) (105) (118) (223)
Forward foreign
exchange contracts 5,835 (4,724) 1,111 99 (127) (28) 1,083 157 32 189
Futures ––––––––––
Purchased options 1,238 – 1,238 – – – 1,238 207 – 207
Written options – (995) (995) – – – (995) (155) – (155)
Commodity Contracts
Swaps 203 (225) (22) – – – (22) 28 – 28
Futures – (1) (1) – – – (1) (1) – (1)
Purchased options 193–193–––193149 – 149
Written options – (165) (165) – – – (165) (123) – (123)
Equity Contracts 23 (13) 10 7 (13) (6) 4 3–3
Total Fair Value $ 12,148 $ (11,536) $ 612 $ 856 $ (1,108) $ (252) $ 360 $ 140 $ 246 $ 386
Total Book Value $ 12,148 $ (11,536) $ 612 $ 404 $ (597) $ (193) $ 419 $ 140 $ 69 $ 209
Average Fair Value $ 7,488 $ (7,312) $ 176 $ 753 $ (713) $ 40 $ 216 $ 84 $ 279 $ 363
88
BANK OF MONTREAL GROUP OF COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22 FAIR VALUE OF FINANCIAL INSTRUMENTS
In order to calculate fair values:
■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.
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 instruments.
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
enteredintoacontract.
Interest rate sensitivity is the main cause of change in the fair value
of our financial instruments.