Goldman Sachs 2002 Annual Report Download - page 56

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The following table sets forth the valuation of our cash trading instruments by level of price transparency as of
November 2002:
CASH TRADING INSTRUMENTS BY PRICE TRANSPARENCY
FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENTS SOLD, BUT NOT YET
(IN MILLIONS) OWNED, AT FAIR VALUE PURCHASED, AT FAIR VALUE
Quoted prices or alternative pricing sources with
reasonable price transparency $81,125 $44,357
Little or no price transparency 4,666 195
To t al $85,791 $44,552
Quoted market prices in active markets are the best evi-
dence of fair value and we use them when available. Such
prices provide the best price transparency and we typi-
cally obtain them through electronic quotations or pub-
lished prices. If quoted market prices in active markets
are not available, our estimate of fair value is based on, if
available, quoted prices or recent transactions in less
active markets and/or prices of similar instruments. These
alternative pricing sources provide some price trans-
parency and we typically obtain this type of information
through broker quotes or third-party pricing services.
If prices are not readily available either through quoted
market prices in active markets or alternative pricing
sources, or if liquidating a position is reasonably
expected to affect market prices, fair value is based on
valuation models or management’s estimate, using the
best information available, of amounts that could be real-
ized under current market conditions, assuming an
orderly liquidation over a reasonable period of time. Our
valuation models consider, among other inputs, contrac-
tual and market prices, yield curves, credit, volatility fac-
tors, prepayment rates and/or correlations of the
underlying positions. Examples of valuation models we
use include the present value of estimated cash flows,
option-pricing models, matrix pricing, option-adjusted
spread models and fundamental analysis. The inputs to
and the design of our valuation models incorporate
assumptions that we believe other market participants
would use in their estimates of fair values. However, dif-
ferent valuation models and assumptions could produce
materially different estimates of fair value.
Management’s Discussion and Analysis
54 GOLDMAN SACHS 2002 ANNUAL REPORT
In determining fair value, we separate our financial instruments into three categories, cash trading instruments (i.e., non-
derivative trading instruments), derivative contracts and principal investments, as set forth in the following table as of
November 2002:
FINANCIAL INSTRUMENTS BY CATEGORY
FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENTS SOLD, BUT NOT YET
(IN MILLIONS) OWNED, AT FAIR VALUE PURCHASED, AT FAIR VALUE
Cash trading instruments $85,791 $44,552
Derivative contracts 42,205 38,921
Principal investments 1,779 —
To t al $129,775 $83,473
Cash Trading Instruments
The fair values of cash trading instruments are generally
obtained from quoted market prices in active markets,
broker or dealer price quotations, or alternative pricing
sources with a reasonable level of price transparency. The
types of instruments valued in this manner include U.S.
government and agency securities, sovereign government
obligations, liquid mortgage products, investment-grade
corporate bonds, listed equities, money market securities,
state, municipal and provincial obligations, and physical
commodities. Certain cash trading instruments have little
or no price transparency, including certain high-yield
debt, corporate bank loans, whole loan mortgages and
distressed debt.