Goldman Sachs 2002 Annual Report Download - page 75

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N otes to Consolidated Financial Statem ents
72 G O L D M A N SA CH S 2002 AN N UA L R EPO RT
Derivative contracts are reported on a net-by-counterparty basis in the firm’s consolidated statements of financial con-
dition when management believes a legal right of setoff exists under an enforceable netting agreement. The fair value of
derivative financial instruments, computed in accordance with the firm’s netting policy, is set forth below:
AS OF NOVEMBER
2002 2001
(IN MILLIONS) ASSETS LIABILITIES ASSETS LIABILITIES
Forward settlement contracts $ 4,293 $ 4,602 $ 5,265 $ 4,491
Swap agreements 22,426 18,516 18,438 15,931
Option contracts 15,486 15,803 14,818 16,238
Total $42,205 $38,921 $38,521 $36,660
Credit Concentrations
Credit concentrations may arise from trading, underwrit-
ing and securities borrowing activities and may be
impacted by changes in economic, industry or political
factors. As of November 2002 and 2001, U.S. govern-
ment and federal agency obligations represented 6% and
7% , respectively, of the firm’s total assets. In addition,
most of the firm’s securities purchased under agreements
to resell are collateralized by U.S. government, federal
agency and other sovereign obligations.
Derivative Activities
Derivative contracts are financial instruments, such as
futures, forwards, swaps or option contracts, that derive
their value from underlying assets, indices, reference rates
or a combination of these factors. Derivatives may
involve future commitments to purchase or sell financial
instruments or commodities, or to exchange currency or
interest payment streams. The amounts exchanged are
based on the specific terms of the contract with reference
to specified rates, securities, commodities or indices.
Derivative contracts exclude certain cash instruments,
such as mortgage-backed securities, interest-only and
principal-only obligations, and indexed debt instruments,
that derive their values or contractually required cash
flows from the price of some other security or index. The
firm includes certain commodity-related contracts in its
derivative disclosure, although not required to do so, as
these contracts may be settled in cash or are readily con-
vertible into cash.
Most of the firm’s derivative transactions are entered into
for trading purposes. The firm uses derivatives in its trad-
ing activities to facilitate customer transactions, to take
proprietary positions and as a means of risk manage-
ment. Risk exposures are managed through diversifica-
tion, by controlling position sizes and by establishing
hedges in related securities or derivatives. For example,
the firm may hedge a portfolio of common stock by tak-
ing an offsetting position in a related equity-index futures
contract. Gains and losses on derivatives used for trading
purposes are generally included in “Trading and principal
investments” in the consolidated statements of earnings.
The firm also enters into derivative contracts, to manage
the interest rate, currency and equity-linked exposure on
its long-term borrowings. These derivatives generally
include interest rate futures contracts, interest rate swap
agreements, currency swap agreements and equity-linked
contracts, which are primarily utilized to convert a sub-
stantial portion of the firm’s long-term debt into U.S. dol-
lar-based floating rate obligations. Certain interest rate
swap contracts are designated as fair-value hedges. The
gains and losses associated with the ineffective portion of
these fair-value hedges are included in “Trading and prin-
cipal investments” in the consolidated statements of earn-
ings and were not material for the years ended November
2002 and November 2001.
Securitization Activities
The firm securitizes commercial and residential mort-
gages and home equity loans, government and corporate
bonds, and other types of financial assets. The firm acts
as underwriter of the beneficial interests that are sold to
investors. The firm derecognizes financial assets trans-
ferred in securitizations provided it has relinquished con-
trol over such assets. Transferred assets are accounted for
at fair value prior to securitization. Underwriting net rev-
enues are recognized in connection with the sales of the
underlying beneficial interests to investors.
The firm may retain interests in securitized financial
assets, which it generally attempts to sell as quickly as
possible, subject to prevailing market conditions.
Retained interests are accounted for at fair value and are
included in “Total financial instruments owned, at fair
value” in the consolidated statements of financial condi-
tion.
During the years ended November 2002 and November
2001, the firm securitized $107.1 billion and $68.8 billion