Goldman Sachs 2003 Annual Report Download - page 83

Notes to Consolidated Financial Statements
GOLDMAN SACHS 2003 ANNUAL REPORT 81
Credit Concentrations
Credit concentrations may arise from trading, underwrit-
ing and securities borrowing activities and may be
impacted by changes in economic, industry or political
factors. As of both November 2003 and November 2002,
the firm held U.S. government and federal agency obliga-
tions that represented 6% of the firm’s total assets. In
addition, most of the firm’s securities purchased under
agreements to resell are collateralized by U.S. govern-
ment, federal agency and other sovereign obligations. As
of November 2003 and November 2002, the firm did not
have credit exposure to any other counterparty that
exceeded 5% of the firm’s total assets.
Derivative Activities
Derivative contracts are instruments, such as futures, for-
wards, swaps or option contracts, that derive their value
from underlying assets, indices, reference rates or a com-
bination of these factors. Derivative instruments may be
privately negotiated contracts, which are often referred to
as OTC derivatives, or they may be listed and traded on
an exchange. Derivatives may involve future commit-
ments to purchase or sell financial instruments or com-
modities, or to exchange currency or interest payment
streams. The amounts exchanged are based on the spe-
cific terms of the contract with reference to specified
rates, securities, commodities, currencies or indices.
Certain cash instruments, such as mortgage-backed securi-
ties, interest-only and principal-only obligations, and
indexed debt instruments, are not considered derivatives
even though their values or contractually required cash
flows are derived from the price of some other security or
index. However, certain commodity-related contracts are
included in the firm’s derivatives disclosure, as these con-
tracts may be settled in cash or are readily convertible
into cash.
Most of the firm’s derivative transactions are entered into
for trading purposes. The firm uses derivatives in its trad-
ing activities to facilitate customer transactions, to take
proprietary positions and as a means of risk manage-
ment. Risk exposures are managed through diversifica-
tion, by controlling position sizes and by establishing
hedges in related securities or derivatives. For example,
the firm may hedge a portfolio of common stock by tak-
ing an offsetting position in a related equity-index futures
contract. Gains and losses on derivatives used for trading
purposes are generally included in “Trading and principal
investments” in the consolidated statements of earnings.
The firm also enters into derivative contracts to manage
the interest rate, currency and equity-linked exposure
on its long-term borrowings. These derivatives generally
include interest rate futures contracts, interest rate swap
agreements, currency swap agreements and equity-linked
contracts, which are primarily utilized to convert a sub-
stantial portion of the firm’s long-term debt into U.S.
dollar-based floating rate obligations. Certain interest rate
swap contracts are designated as fair-value hedges. The
gains and losses associated with the ineffective portion
of these fair-value hedges are included in “Trading and
principal investments” in the consolidated statements of
earnings and were not material for the years ended
November 2003, November 2002 and November 2001.
Derivative contracts are reported on a net-by-counterparty basis in the firm’s consolidated statements of financial con-
dition when management believes a legal right of setoff exists under an enforceable netting agreement. The fair value of
derivative financial instruments, computed in accordance with the firm’s netting policy, is set forth below:
AS OF NOVEMBER
2003 2002
(IN MILLIONS) ASSETS LIABILITIES ASSETS LIABILITIES
Forward settlement contracts $ 8,134 $ 9,271 $ 4,293 $ 4,602
Swap agreements 25,471 17,317 22,426 18,516
Option contracts 12,128 15,298 15,486 15,803
Total $45,733 $41,886 $42,205 $38,921