Goldman Sachs 2001 Annual Report Download - page 44

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page 42
GOLDMAN SACHS ANNUAL REPORT 2001
As part of our overall risk control process, daily trading net rev-
enues are compared with VaR calculated as of the end of the
prior business day. Trading losses incurred on a single day
exceeded our 95% one-day VaR on one occasion during 2001.
Nontrading Risk
The market risk for financial instruments in the firm’s non-
trading portfolio, including our merchant banking investments,
is measured using a sensitivity analysis that estimates the poten-
tial reduction in our net revenues associated with a 10% decline
in equity markets. This sensitivity analysis is based on certain
assumptions regarding the relationship between changes in the
stock price indices and changes in the fair value of the individ-
ual financial instruments in our nontrading portfolio. Different
assumptions could produce materially different risk estimates.
As of November 2001, the sensitivity of our nontrading port-
folio to a 10% equity market decline was $155 million.
Credit Risk
Credit risk represents the loss that we would incur if a counter-
party, 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 netting agree-
ments with counterparties that permit us to offset receivables
and payables with such counterparties. In addition, we attempt
to further reduce credit risk with certain counterparties by enter-
ing 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 counter-
party’s obligations, and through the use of credit derivatives and
through other structures and techniques.
For most businesses, counterparty credit limits are established
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 mea-
sure and limit credit exposures by reference 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 collateral-
ized transactions we also evaluate potential exposure over
a shorter collection period, and give effect to the value of
received collateral. We further seek to measure credit exposure
through the use of scenario analyses, stress tests and other quan-
titative tools. Our global credit management systems monitor
current and potential credit exposure to individual counterparties
and on an aggregate basis to counterparties and their affiliates.
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 2001:
<(20) (20)-0 20-40
0-20 40-60 60-80 >80
DAILY TRADING NET REVENUES
NUMBER OF DAYS
0
20
40
60
80
100
Daily Trading Net Revenues
($ IN MILLIONS)