Goldman Sachs 2013 Annual Report Download - page 142

Notes to Consolidated Financial Statements
Range of Significant Unobservable Inputs
The following provides further information about the
ranges of significant unobservable inputs used to value the
firm’s level 3 derivative instruments.
‰Correlation: Ranges for correlation cover a variety of
underliers both within one market (e.g., equity index and
equity single stock names) and across markets (e.g.,
correlation of a commodity price and a foreign exchange
rate), as well as across regions. Generally, cross-asset
correlation inputs are used to value more complex
instruments and are lower than correlation inputs on
assets within the same derivative product type.
‰Volatility: Ranges for volatility cover numerous
underliers across a variety of markets, maturities and
strike prices. For example, volatility of equity indices is
generally lower than volatility of single stocks.
‰Credit spreads, upfront credit points and recovery rates:
The ranges for credit spreads, upfront credit points and
recovery rates cover a variety of underliers (index and
single names), regions, sectors, maturities and credit
qualities (high-yield and investment-grade). The broad
range of this population gives rise to the width of the
ranges of significant unobservable inputs.
‰Commodity prices and spreads: The ranges for
commodity prices and spreads cover variability in
products, maturities and locations, as well as peak and
off-peak prices.
Sensitivity of Fair Value Measurement to Changes
in Significant Unobservable Inputs
The following provides a description of the directional
sensitivity of the firm’s level 3 fair value measurements to
changes in significant unobservable inputs, in isolation.
Due to the distinctive nature of each of the firm’s level 3
derivatives, the interrelationship of inputs is not necessarily
uniform within each product type.
‰Correlation: In general, for contracts where the holder
benefits from the convergence of the underlying asset or
index prices (e.g., interest rates, credit spreads, foreign
exchange rates, inflation rates and equity prices), an
increase in correlation results in a higher fair
value measurement.
‰Volatility: In general, for purchased options an increase in
volatility results in a higher fair value measurement.
‰Credit spreads, upfront credit points and recovery rates:
In general, the fair value of purchased credit protection
increases as credit spreads or upfront credit points
increase or recovery rates decrease. Credit spreads,
upfront credit points and recovery rates are strongly
related to distinctive risk factors of the underlying
reference obligations, which include reference entity-
specific factors such as leverage, volatility and industry,
market-based risk factors, such as borrowing costs or
liquidity of the underlying reference obligation, and
macroeconomic conditions.
‰Commodity prices and spreads: In general, for contracts
where the holder is receiving a commodity, an increase in
the spread (price difference from a benchmark index due
to differences in quality or delivery location) or price
results in a higher fair value measurement.
140 Goldman Sachs 2013 Annual Report