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Notes to Consolidated Financial Statements
Note 7.
Derivatives and Hedging Activities
Derivative Activities
Derivatives are instruments that derive their value from
underlying asset prices, indices, reference rates and other
inputs, or a combination of these factors. Derivatives may
be traded on an exchange (exchange-traded) or they may be
privately negotiated contracts, which are usually referred to
as over-the-counter (OTC) derivatives. Certain of the firm’s
OTC derivatives are cleared and settled through central
clearing counterparties (OTC-cleared), while others are
bilateral contracts between two counterparties
(bilateral OTC).
Market-Making. As a market maker, the firm enters into
derivative transactions to provide liquidity to clients and to
facilitate the transfer and hedging of their risks. In this
capacity, the firm typically acts as principal and is
consequently required to commit capital to provide
execution. As a market maker, it is essential to maintain an
inventory of financial instruments sufficient to meet
expected client and market demands.
Risk Management. The firm also enters into derivatives to
actively manage risk exposures that arise from its market-
making and investing and lending activities in derivative
and cash instruments. The firm’s holdings and exposures
are hedged, in many cases, on either a portfolio or risk-
specific basis, as opposed to an instrument-by-instrument
basis. The offsetting impact of this economic hedging is
reflected in the same business segment as the related
revenues. In addition, the firm may enter into derivatives
designated as hedges under U.S. GAAP. These derivatives
are used to manage interest rate exposure in certain fixed-
rate unsecured long-term and short-term borrowings, and
deposits, to manage foreign currency exposure on the net
investment in certain non-U.S. operations, and to manage
the exposure to the variability in cash flows associated with
the forecasted sales of certain energy commodities by one of
the firm’s consolidated investments.
The firm enters into various types of derivatives, including:
Futures and Forwards. Contracts that commit
counterparties to purchase or sell financial instruments,
commodities or currencies in the future.
Swaps. Contracts that require counterparties to
exchange cash flows such as currency or interest payment
streams. The amounts exchanged are based on the
specific terms of the contract with reference to specified
rates, financial instruments, commodities, currencies
or indices.
Options. Contracts in which the option purchaser has
the right, but not the obligation, to purchase from or sell
to the option writer financial instruments, commodities
or currencies within a defined time period for a
specified price.
Derivatives are reported on a net-by-counterparty basis
(i.e., the net payable or receivable for derivative assets and
liabilities for a given counterparty) when a legal right of
setoff exists under an enforceable netting agreement
(counterparty netting). Derivatives are accounted for at fair
value, net of cash collateral received or posted under
enforceable credit support agreements (collateral netting).
Derivative assets and liabilities are included in “Financial
instruments owned, at fair value” and “Financial
instruments sold, but not yet purchased, at fair value,”
respectively. Substantially all gains and losses on derivatives
not designated as hedges under ASC 815 are included in
“Market making” and “Other principal transactions.”
The table below presents the fair value of derivatives on a
net-by-counterparty basis.
As of December 2013
in millions
Derivative
Assets
Derivative
Liabilities
Exchange-traded $ 4,277 $ 6,366
OTC 53,602 43,356
Total $57,879 $49,722
As of December 2012
in millions
Derivative
Assets Derivative
Liabilities
Exchange-traded $ 3,772 $ 2,937
OTC 67,404 47,490
Total $71,176 $50,427
134 Goldman Sachs 2013 Annual Report