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GOLDMAN฀SAC H S ฀ 2004฀ A N N U A L ฀ R E P ORT ฀ ฀ ฀ 3 7
management’s฀discussion฀and฀analysis
management’s฀discussion฀and฀analysis
GOLDMAN฀SAC H S ฀ 2004฀ A N N U A L ฀ R E P ORT ฀ ฀ ฀ 3 7
Cash trading instruments we own (long positions) are marked
to bid prices and instruments we have sold but not yet pur-
chased (short positions) are marked to offer prices. If liquidat-
ing a position is reasonably expected to affect its prevailing
market price, our valuation is adjusted generally based on
market evidence or predetermined policies. In certain circum-
stances, such as for highly illiquid positions, management’s
estimates are used to determine this adjustment.
Fair values of our exchange-traded derivatives are generally
determined from quoted market prices. OTC derivatives are
valued using valuation models. We use a variety of valuation
models including the present value of known or estimated cash
flows, option-pricing models and option-adjusted spread
models. The valuation models that we use to derive the fair
values of our OTC derivatives require inputs including contrac-
tual terms, market prices, yield curves, credit curves, measures
of volatility, prepayment rates and correlations of such inputs.
The selection of a model to value an OTC derivative depends
upon the contractual terms of, and specific risks inherent in, the
instrument as well as the availability of pricing information in
the market. We generally use similar models to value similar
instruments. Where possible, we verify the values produced by
our pricing models to market transactions. For OTC derivatives
that trade in liquid markets, such as generic forwards, swaps and
options, model selection does not involve significant judgment
because market prices are readily available. For OTC deriva-
tives that trade in less liquid markets, model selection requires
more judgment because such instruments tend to be more com-
plex and pricing information is less available in the market. As
markets continue to develop and more pricing information
becomes available, we continue to review and refine the models
that we use.
At the inception of an OTC derivative contract (day one), we
value the contract at the model value if we can verify all of the
significant model inputs to observable market data and verify the
model to market transactions. When appropriate, valuations are
adjusted to reflect various factors such as liquidity, bid/offer and
credit considerations. These adjustments are generally based on
market evidence or predetermined policies. In certain circum-
stances, such as for highly illiquid positions, management’s esti-
mates are used to determine these adjustments.
The following table sets forth the valuation of our cash trading instruments by level of price transparency:
cash฀trading฀instruments฀by฀price฀transparency
฀ ฀ AS฀OF฀NOVEMBER฀
฀2004฀฀ 2003
฀FINANCIAL฀ FINANCIAL฀INSTRUMENTS฀ FINANCIAL฀ FINANCIAL฀INSTRUMENTS฀
฀INSTRUMENTS฀ ฀SOLD,฀BUT฀NOT฀YET฀ INSTRUMENTS฀ SOLD,฀BUT฀NOT฀YET฀
฀OWNED,฀AT฀ PURCHASED,฀AT฀ OWNED,฀AT฀ PURCHASED,฀AT฀
(IN฀MILLIONS)฀ FAIR฀VALUE฀ ฀FAIR฀VALUE฀ FAIR฀VALUE฀ FAIR฀VALUE
Quoted prices or alternative
pricing sources with
reasonable price transparency $130,908฀ $67,948 $102,306 $60,673
Little or no price transparency 12,468฀ 148 7,851฀ 140
Total $143,376฀ $68,096 $110,157฀ $60,813
derivat i ve฀contr acts฀–฀Derivative contracts consist of exchange-traded and over-the-counter (OTC) derivatives. The following
table sets forth the fair value of our exchange-traded and OTC derivative assets and liabilities:
derivative฀assets฀and฀liabilities
฀ ฀ AS฀OF฀NOVEMBER฀
฀2004฀ 2003
(IN฀MILLIONS)฀ ASSETS฀ LIABILITIES฀ ASSETS฀ LIABILITIES
Exchange-traded derivatives $฀฀5,464฀ $฀฀฀5,905 $฀฀5,182฀ $฀฀฀6,339
OTC derivatives 57,031฀ ฀58,096 40,551฀ 35,547
Total(1) $62,495฀ $64,001 $45,733฀ $41,886
(1)฀฀The฀fair฀values฀of฀our฀derivative฀assets฀and฀liabilities฀include฀cash฀we฀have฀paid฀and฀received฀(for฀example,฀option฀premiums฀or฀cash฀paid฀or฀received฀pursu-
ant฀to฀credit฀support฀agreements)฀and฀may฀change฀significantly฀from฀period฀to฀period฀based฀on,฀among฀other฀factors,฀changes฀in฀our฀trading฀positions฀and฀
market฀movements.
BES฀•฀Phone฀(201)฀635-5240฀฀•฀FAX฀(201)฀635-5199
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