Goldman Sachs 2013 Annual Report Download - page 92

Management’s Discussion and Analysis
Market Risk Management
Overview
Market risk is the risk of loss in the value of our inventory,
as well as certain other financial assets and financial
liabilities, due to changes in market conditions. The firm
employs a variety of risk measures, each described in the
respective sections below, to monitor market risk. 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 crude oil, petroleum products,
natural gas, electricity, 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. Our primary risk measures are VaR, which is
used for shorter-term periods, and 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.
Value-at-Risk
VaR is the potential loss in value due to adverse market
movements over a defined time horizon with a specified
confidence level. For positions included in VaR, see
“— Financial Statement Linkages to Market Risk
Measures.” We typically employ a one-day time horizon
with a 95% confidence level. We use a single VaR model
which captures risks including interest rates, equity prices,
currency rates and commodity prices. As such, VaR
facilitates comparison across portfolios of different risk
characteristics. VaR also captures the diversification of
aggregated risk at the firmwide level.
90 Goldman Sachs 2013 Annual Report