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GOLDMAN฀SAC H S ฀ 2004฀ A N N U A L ฀ R E P ORT ฀ ฀ ฀ 6 1
management’s฀discussion฀and฀analysis
GOLDMAN฀SAC H S ฀ 2004฀ A N N U A L ฀ R E P ORT ฀ ฀ ฀ 6 1
DERIVATIVES
Derivative contracts are instruments, such as futures, forwards,
swaps or option contracts, which derive their value from under-
lying assets, indices, reference rates or a combination of these
factors. Derivative instruments may be privately negotiated
contracts, which are often referred to as OTC derivatives, or
they may be listed and traded on an exchange.
Substantially all of our derivative transactions are entered into
for trading purposes, in order to facilitate customer transac-
tions, to take proprietary positions or as a means of risk man-
agement. In addition to derivative transactions entered into for
trading purposes, we enter into derivative contracts to hedge
our net investment in non-U.S. operations and to manage the
interest rate and currency exposure on our long-term borrow-
ings and certain short-term borrowings.
Derivatives are used in many of our businesses, and we believe that
the associated market risk can only be understood relative to the
underlying assets or risks being hedged, or as part of a broader
trading strategy. Accordingly, the market risk of derivative posi-
tions is managed with all of our other nonderivative market risk.
Fair values of our derivative contracts reflect cash paid or received
pursuant to credit support agreements and are reported on a net-
by-counterparty basis in our consolidated statements of financial
condition when management believes a legal right of setoff exists
under an enforceable netting agreement. For an OTC derivative,
our credit exposure is directly with our counterparty and contin-
ues until the maturity or termination of such contract.
The following table sets forth the distribution, by credit rating, of substantially all of our exposure with respect to OTC derivatives
as of November 2004, after taking into consideration the effect of netting agreements. The categories shown reflect our internally
determined public rating agency equivalents.
over-the-counter฀derivative฀credit฀exposure
($฀IN฀MILLIONS)฀ ฀ ฀ ฀
฀ ฀ ฀ ฀ ฀ PERCENTAGE฀
฀ ฀ ฀ ฀ ฀ OF฀TOTAL฀฀
฀ ฀ ฀ ฀ EXPOSURE฀ EXPOSURE฀ ฀
฀ ฀ ฀ COLLATERAL฀ NET฀OF฀ NET฀OF฀฀ ฀฀฀
CREDIT฀RATING฀EQUIVALENT฀ EXPOSURE(1)฀ HELD฀ COLLATERAL฀ COLLATERAL
AAA/Aaa $฀฀4,700฀ $฀฀฀136฀ $฀฀4,564฀ 9%
AA/Aa2 13,553฀ 1,467฀ 12,086฀ 25
A/A2 19,133฀ 2,000฀ 17,133฀ 36
BBB/Baa2 10,362฀ 2,257฀ 8,105฀ 17
BB/Ba2 or lower 8,464฀ 2,640฀ 5,824฀ 12
Unrated 819฀ 475฀ 344฀ 1
Total $57,031฀ $8,975฀ $48,056฀ 100%
(1)฀Reflects฀cash฀received฀pursuant฀to฀credit฀support฀agreements.
BES฀•฀Phone฀(212)฀924-5500฀•฀FAX฀(212)฀229-7392
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