Goldman Sachs 2000 Annual Report Download - page 59

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ment streams. The amounts exchanged are based on the
specific terms of the contract with reference to specified
rates, securities, commodities or indices.
Derivative contracts exclude certain cash instruments, such
as mortgage-backed securities, interest-only and princi-
pal-only obligations, and indexed debt instruments, that
derive their values or contractually required cash flows from
the price of some other security or index. Derivatives also
exclude option features that are embedded in cash instru-
ments, such as the conversion features and call provisions
embedded in bonds. The firm has elected to include com-
modity-related contracts in its derivative disclosure,
although not required to do so, as these contracts may be
settled in cash or are readily convertible into cash.
57
The gross notional (or contractual) amounts of derivative financial instruments represent the volume of these transactions and
not the amounts potentially subject to market risk. In addition, measurement of market risk is meaningful only when all related
and offsetting transactions are taken into consideration. Gross notional (or contractual) amounts of derivative financial
instruments used for trading purposes with off-balance-sheet market risk are set forth below:
As of November
(in millions) 2000 1999
Interest Rate
Financial futures and forward settlement contracts $ 320,811 $ 422,465
Swap agreements 3,588,814 2,581,100
Written option contracts 350,977 509,841
Equity
Financial futures and forward settlement contracts 12,508 10,082
Swap agreements 4,520 3,423
Written option contracts 115,327 113,653
Currency and Commodity
Financial futures and forward settlement contracts 415,282 460,941
Swap agreements 185,288 110,159
Written option contracts 226,058 193,989
Market risk on purchased option contracts is limited to the market value of the option; therefore, purchased option contracts
have no off-balance-sheet market risk. The gross notional (or contractual) amounts of purchased option contracts used for
trading purposes are set forth below:
As of November
(in millions) 2000 1999
Purchased Option Contracts
Interest rate $427,176 $484,104
Equity 123,645 114,680
Currency and commodity 212,583 210,421
The firm utilizes replacement cost as its measure of deriva-
tive credit risk. Replacement cost, as reported in “Financial
instruments owned, at fair value” on the consolidated
statements of financial condition, represents amounts
receivable from various counterparties, net of any unreal-
ized losses, where management believes a legal right of
setoff exists under an enforceable netting agreement.
Replacement cost for purchased option contracts is the
market value of the contract. The firm controls its credit risk
through an established credit approval process, by moni-
toring counterparty limits, obtaining collateral where
appropriate and, in some cases, entering into enforceable
netting agreements.