Goldman Sachs 2012 Annual Report Download - page 90

Management’s Discussion and Analysis
Market Risk Management
Overview
Market risk is the risk of loss in the value of our inventory
due to changes in market prices. We hold inventory
primarily for market making for our clients and for our
investing and lending activities. Our inventory therefore
changes based on client demands and our investment
opportunities. Our inventory is accounted for at fair value
and therefore fluctuates on a daily basis, with the related
gains and losses included in “Market making,” and “Other
principal transactions.” Categories of market risk include
the following:
‰Interest rate risk: results from exposures to changes in the
level, slope and curvature of yield curves, the volatilities
of interest rates, mortgage prepayment speeds and
credit spreads.
‰Equity price risk: results from exposures to changes in
prices and volatilities of individual equities, baskets of
equities and equity indices.
‰Currency rate risk: results from exposures to changes in
spot prices, forward prices and volatilities of
currency rates.
‰Commodity price risk: results from exposures to changes
in spot prices, forward prices and volatilities of
commodities, such as electricity, natural gas, crude oil,
petroleum products, and precious and base metals.
Market Risk Management Process
We manage our market risk by diversifying exposures,
controlling position sizes and establishing economic hedges
in related securities or derivatives. This includes:
‰accurate and timely exposure information incorporating
multiple risk metrics;
‰a dynamic limit setting framework; and
‰constant communication among revenue-producing
units, risk managers and senior management.
Market Risk Management, which is independent of the
revenue-producing units and reports to the firm’s chief risk
officer, has primary responsibility for assessing, monitoring
and managing market risk at the firm. We monitor and
control risks through strong firmwide oversight and
independent control and support functions across the firm’s
global businesses.
Managers in revenue-producing units are accountable for
managing risk within prescribed limits. These managers
have in-depth knowledge of their positions, markets and
the instruments available to hedge their exposures.
Managers in revenue-producing units and Market Risk
Management discuss market information, positions and
estimated risk and loss scenarios on an ongoing basis.
Risk Measures
Market Risk Management produces risk measures and
monitors them against market risk limits set by our firm’s
risk committees. These measures reflect an extensive range
of scenarios and the results are aggregated at trading desk,
business and firmwide levels.
We use a variety of risk measures to estimate the size of
potential losses for both moderate and more extreme
market moves over both short-term and long-term time
horizons. Risk measures used for shorter-term periods
include VaR and sensitivity metrics. For longer-term
horizons, our primary risk measures are stress tests. Our
risk reports detail key risks, drivers and changes for each
desk and business, and are distributed daily to senior
management of both our revenue-producing units and our
independent control and support functions.
Systems
We have made a significant investment in technology to
monitor market risk including:
‰an independent calculation of VaR and stress measures;
‰risk measures calculated at individual position levels;
‰attribution of risk measures to individual risk factors of
each position;
‰the ability to report many different views of the risk
measures (e.g., by desk, business, product type or legal
entity); and
‰the ability to produce ad hoc analyses in a timely manner.
88 Goldman Sachs 2012 Annual Report