Goldman Sachs 2000 Annual Report Download - page 44

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As part of our overall risk control process, daily trading net
revenues are compared with VaR calculated as of the end of
the prior business day. Trading losses incurred on a single
day did not exceed our 95% one-day VaR during 2000.
Nontrading Risk
The market risk on our nontrading financial instruments,
including our merchant banking investments, is measured
using a sensitivity analysis that estimates the potential
reduction in our net revenues associated with a 10%
decline in the S&P 500. This sensitivity analysis is based on
certain assumptions regarding the relationship between
changes in the S&P 500 and changes in the fair value of the
individual nontrading financial instruments. Different
assumptions could produce materially different risk esti-
mates. As of November 2000, our nontrading market risk
was approximately $240 million.
Credit Risk
Credit risk represents the loss that we would incur if a coun-
terparty, or an issuer of securities or other instruments we
hold, fails to perform under its contractual obligations to us.
To reduce our credit exposures, we seek to enter into net-
ting agreements with counterparties that permit us to offset
receivables and payables with such counterparties. In addi-
tion, we attempt to further reduce credit risk with certain
counterparties by entering into agreements that enable us
to obtain collateral from a counterparty or to terminate or
reset the terms of transactions after specified time periods
or upon the occurrence of credit-related events, by seeking
third-party guarantees of the counterparty’s obligations,
through the use of credit derivatives and through other
structures and techniques.
For most businesses, counterparty credit limits are estab-
lished by the Credit Department, which is independent of the
revenue-producing departments, based on guidelines set
by the Firmwide Risk and Credit Policy committees. For most
products, we measure and limit credit exposures by refer-
ence to both current and potential exposure. We typically
measure potential exposure based on projected worst-
case market movements over the life of a transaction within
a 95% confidence interval. For collateralized transactions
we also evaluate potential exposure over a shorter collec-
tion period, and give effect to the value of received collat-
eral. We further seek to measure credit exposure through
the use of scenario analyses and other quantitative tools.
Our global credit management systems monitor current and
42 Goldman Sachs Annual Report 2000
Trading Net Revenues Distribution
Substantially all of our inventory positions are marked-to-market on a daily basis and changes are recorded in net
revenues. The following chart sets forth the frequency distribution for substantially all of our daily trading net revenues for
the year ended November 2000:
Daily Trading Net Revenues
70
60
50
40
30
20
10
0
(30)-(20)
(20)-(10)
(10)-0
0-10
10-20
20-30
30-40
40-50
50-60
60-90
Daily Trading Net Revenues ($ in millions)
Number of Days