Bank of Montreal 2000 Annual Report Download - page 88

Notes to Consolidated Financial Statements
64 ■Bank of Montreal Group of Companies Annual Report 2000
Note 22 Fair Value of Financial Instruments
As a financial institution we record trading assets at market values
and non-trading assets and liabilities at their original amortized
cost less allowances or write-downs for impairment. Fair value is
subjective in nature, requiring a variety of valuation techniques and
assumptions. The values are based upon the estimated amounts for
individual assets and liabilities and do not include an estimate of
the fair value of any of our legal entities or underlying operations
that comprise our business.
Fair value amounts generally represent our estimate of the
amounts we could exchange the financial instruments for with third
parties who were interested in acquiring the instruments. In most
cases, however, the financial instruments are not typically exchange -
able or exchanged and therefore it is difficult to determine their fair
value. In those cases, we have estimated fair value assuming that we
will not sell the assets or liabilities, taking into account only changes
in interest rates and credit risk that have occurred since we acquired
them or entered into a contract.
Interest rate changes are the main cause of change in the fair value
of our financial instruments.
The following table provides the fair value of our derivative financial instruments portfolio, which is represented by the sum of net unrealized
gains and losses, accrued interest receivable or payable and premiums paid or received:
2000 1999
Customer Asset/liability
Customer trading Asset/liability management Total trading management Total
Gross Gross Gross Gross
assets liabilities Net assets liabilities Net Net Net Net Net
Interest Rate Contracts
Swaps $ 3,320 $ (3,915) $ (595) $ 288 $ (167) $ 121 $ (474) $ (232) $ 251 $ 19
Forward rate agreements 59 (55) 4 ––– 4(15) (1) (16)
Futures 6 – 6 ––– 614 – 14
Purchased options 795 154 949 2 – 2 951 563 1 564
Written options – (781) (781) – (2) (2) (783) (462) (14) (476)
Foreign Exchange Contracts
Cross-currency swaps 122 (195) (73) ––– (73) 77 – 77
Cross-currency interest rate swaps 993 (821) 172 83 (306) (223) (51) (18) (273) (291)
Forward foreign exchange contracts 2,967 (2,671) 296 87 (96) (9) 287 539 (28) 511
Futures ––––––––––
Purchased options 952 – 952 ––– 952 554 – 554
Written options – (765) (765) ––– (765) (490) – (490)
Commodity Contracts
Swaps 1,781 (1,784) (3) ––– (3) 39 – 39
Futures – (2) (2) ––– (2) (1) – (1)
Purchased options 2,531 – 2,531 ––– 2,531 630 – 630
Written options – (1,914) (1,914) ––– (1,914) (425) – (425)
Equity Contracts 67 (146) (79) 34 – 34 (45) (124) 3 (121)
Total Fair Value $ 13,593 $ (12,895) $ 698 $ 494 $ (571) $ (77) $ 621 $ 649 $ (61) $ 588
Total Book Value $ 13,593 $ (12,895) $ 698 $ 404 $ (447) $ (43) $ 655 $ 649 $ (83) $ 566
Average Fair Value $ 10,792 $ (10,061) $ 731 $ 553 $ (582) $ (29) $ 702 $ 641 $ (112) $ 529
In order to calculate fair values:
■Instruments are marked to market using quoted market rates and/or zero coupon valuation
techniques.
■Zero coupon curves are created using generally accepted mathematical processes from under-
lying instruments such as cash, bonds, futures and off-balance sheet prices observable in
the market.
■Options implied volatilities are either obtained directly from market sources or calculated
from market prices utilizing the appropriate options pricing models given our assessment and
market conventions.
Assets are shown net of liabilities to customers where we have an enforceable right to offset
amounts and we intend to settle contracts on a net basis.