Goldman Sachs 2009 Annual Report Download - page 118

Goldman Sachs 2009 Annual Report
116
Notes to Consolidated Financial Statements
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Credit default swaps. Single-name credit default swaps
protect the buyer against the loss of principal on one or more
bonds, loans or mortgages (reference obligations) in the
event of a default by the issuer (reference entity). The buyer
of protection pays an initial or periodic premium to the seller
and receives credit default protection for the period of the
contract. If there is no credit default event, as de ned by
the speci c derivative contract, then the seller of protection
makes no payments to the buyer of protection. However,
if a credit default event occurs, the seller of protection will
be required to make a payment to the buyer of protection.
Typical credit default events requiring payment include
bankruptcy of the reference credit entity, failure to pay
the principal or interest, and restructuring of the relevant
obligations of the reference entity.
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Credit indices, baskets and tranches. Credit derivatives
may reference a basket of single-name credit default
swaps or a broad-based index. Typically, in the event of
a default of one of the underlying reference obligations,
the protection seller will pay to the protection buyer a
pro-rata portion of a transaction’s total notional amount
relating to the underlying defaulted reference obligation. In
tranched transactions, the credit risk of a basket or index is
separated into various portions each having different levels
of subordination. The most junior tranches cover initial
defaults, and once losses exceed the notional amount of
these tranches, the excess is covered by the next most senior
tranche in the capital structure.
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Total return swaps. A total return swap transfers the risks
relating to economic performance of a reference obligation
from the protection buyer to the protection seller. Typically,
the protection buyer receives from the protection seller a
 oating rate of interest and protection against any reduction
in fair value of the reference obligation, and in return the
protection seller receives the cash  ows associated with the
reference obligation, plus any increase in the fair value of the
reference obligation.
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Credit options. In a credit option, the option writer assumes
the obligation to purchase or sell a reference obligation at a
speci ed price or credit spread. The option purchaser buys
the right to sell the reference obligation to, or purchase it
from, the option writer. The payments on credit options
depend either on a particular credit spread or the price of the
reference obligation.
Substantially all of the  rm’s purchased credit derivative
transactions are with  nancial institutions and are subject to
stringent collateral thresholds. The  rm economically hedges
its exposure to written credit derivatives primarily by entering
into offsetting purchased credit derivatives with identical
underlyings. In addition, upon the occurrence of a speci ed
trigger event, the  rm may take possession of the reference
obligations underlying a particular written credit derivative, and
consequently may, upon liquidation of the reference obligations,
recover amounts on the underlying reference obligations in the
event of default. As of December2009, the  rm’s written and
purchased credit derivatives had total gross notional amounts
of $2.54trillion and $2.71trillion, respectively, for total net
purchased protection of $164.13billion in notional value. As
of November2008, the  rm’s written and purchased credit
derivatives had total gross notional amounts of $3.78trillion
and $4.03trillion, respectively, for total net purchased
protection of $255.24billion in notional value. The decrease
in notional amounts from November2008 to December2009
primarily re ects compression efforts across the industry.