Goldman Sachs 2009 Annual Report Download - page 116

Goldman Sachs 2009 Annual Report
114
Notes to Consolidated Financial Statements
The  rm applies a long-haul method to all of its hedge
accounting relationships to perform an ongoing assessment of
the effectiveness of these relationships in achieving offsetting
changes in fair value or offsetting cash  ows attributable to
the risk being hedged. The  rm utilizes a dollar-offset method,
which compares the change in the fair value of the hedging
instrument to the change in the fair value of the hedged item,
excluding the effect of the passage of time, to prospectively
and retrospectively assess hedge effectiveness under the long-
haul method. The  rm’s prospective dollar-offset assessment
utilizes scenario analyses to test hedge effectiveness via
simulations of numerous parallel and slope shifts of the
relevant yield curve. Parallel shifts change the interest rate
of all maturities by identical amounts. Slope shifts change
the curvature of the yield curve. For both the prospective
assessment, in response to each of the simulated yield curve
shifts, and the retrospective assessment, a hedging relationship
is deemed to be effective if the fair value of the hedging
instrument and the hedged item change inversely within a
range of 80% to 125%.
For fair value hedges, gains or losses on derivative transactions
are recognized in “Interest expense” in the consolidated
statements of earnings. The change in fair value of the hedged
item attributable to the risk being hedged is reported as an
adjustment to its carrying value and is subsequently amortized
into interest expense over its remaining life. Gains or losses
related to hedge ineffectiveness for these hedges are included in
“Interest expense” in the consolidated statements of earnings.
These gains or losses were not material for the years ended
December2009, November2008 and November2007 or
the one month ended December2008. Gains and losses on
derivatives used for trading purposes are included in “Trading
and principal investments” in the consolidated statements
ofearnings.
The fair value of the  rm’s derivative contracts is re ected
net of cash paid or received pursuant to credit support
agreements and is reported on a net-by-counterparty basis
in the  rm’s consolidated statements of  nancial condition
when management believes a legal right of setoff exists under
an enforceable netting agreement. The following table sets
forth the fair value and the number of contracts of the  rm’s
derivative contracts by major product type on a gross basis
as of December2009. Gross fair values in the table below
exclude the effects of both netting under enforceable netting
agreements and netting of cash received or posted pursuant to
credit support agreements, and therefore are not representative
of the  rm’s exposure:
As of December2009
(inmillions, except Derivative Derivative Number of
number of contracts) Assets Liabilities Contracts
Derivative contracts for
trading activities
Interest rates $ 458,614 (4) $ 407,125 (4) 270,707
Credit 164,669 134,810 443,450
Currencies 77,223 62,413 171,760
Commodities 47,234 48,163 73,010
Equities 67,559 53,207 237,625
Subtotal $ 815,299 $ 705,718 1,196,552
Derivative contracts
accounted for
as hedges
(1)
Interest rates $ 19,563
(5) $ 1 (5) 806
Currencies 8
(6) 47 (6) 58
Subtotal $ 19,571 $ 48 864
Gross fair value of
derivative contracts $ 834,870 $ 705,766 1,197,416
Counterparty netting
(2) (635,014) (635,014)
Cash collateral netting
(3) (124,603) (14,743)
Fair value included in
trading assets,
at fair value $ 75,253
Fair value included in
trading liabilities,
at fair value $ 56,009
(1) As of November2008, the gross fair value of derivative contracts
accounted for as hedges consisted of $20.40billion in assets and
$128million in liabilities.
(2) Represents the netting of receivable balances with payable balances for
the same counterparty pursuant to enforceable netting agreements.
(3) Represents the netting of cash collateral received and posted on a
counterparty basis pursuant to credit support agreements.
(4) Presented after giving effect to $412.08billion of derivative assets and
$395.57billion of derivative liabilities settled with clearing organizations.
(5) For the year ended December2009 and one month ended
December2008, the gain/(loss) recognized on interest rate derivative
contracts accounted for as hedges was $(10.07)billion and $3.59billion,
respectively, and the related gain/(loss) recognized on the hedged
borrowings and bank deposits was $9.95billion and $(3.53)billion,
respectively. These gains and losses are included in “Interest expense”
in the consolidated statements of earnings. For the year ended
December2009, the gain/(loss) recognized on these derivative contracts
included losses of $1.23billion, which were excluded from the assessment
of hedge effectiveness. Such excluded gains/(losses) were not material for
the one month ended December2008.
(6) For the year ended December2009 and one month ended
December2008, the loss on currency derivative contracts accounted
for as hedges was $495million and $212million, respectively. Such
amounts are included in “Currency translation adjustment, net of tax” in
the consolidated statements of comprehensive income. The gain/(loss)
related to ineffectiveness and the gain/(loss) reclassi ed to earnings from
accumulated other comprehensive income were not material for the year
ended December2009 or the one month ended December2008.