Goldman Sachs 2009 Annual Report Download - page 70

activities. In addition to reviewing speci c transactions, the
Commitments Committeeperiodically conducts strategic
reviews of industry sectors and products and establishes
policies in connection with transaction practices.
Credit Policy Committee. The Credit Policy Committee
establishes and reviews broad credit policies and parameters
that are implemented by the Credit Department.
Finance Committee. The Finance Committee has oversight
responsibility for liquidity risk, the size and composition of
our balance sheet and capital base, and our credit ratings.
The Finance Committee regularly reviews our liquidity,
balance sheet, funding position and capitalization and makes
adjustments in light of current events, risks and exposures,
and regulatory requirements.
New Products Committee. The New Products Committee,
under the oversight of the Firmwide Risk Committee, is
responsible for reviewing and approving new product proposals.
Operational Risk Committee. The Operational Risk
Committee provides oversight of the ongoing development and
implementation of our operational risk policies, framework
and methodologies, and monitors the effectiveness of
operational risk management.
Structured Products Committee. The Structured Products
Committee reviews and approves proposed structured product
transactions to be entered into with our clients that raise legal,
regulatory, tax or accounting issues or present reputational
risk to Goldman Sachs.
Market Risk
The potential for changes in the market value of our trading
and investing positions is referred to as market risk. Such
positions result from market-making, proprietary trading,
underwriting and investing activities. Substantially all of our
inventory positions are marked-to-market on a daily basis and
changes are recorded in net revenues.
Categories of market risk include exposures to interest
rates, equity prices, currency rates and commodity prices. A
description of each market risk category is set forth below:
▪
Interest rate risks primarily result from exposures to changes in
the level, slope and curvature of the yield curve, the volatility of
interest rates, mortgage prepayment speeds and credit spreads.
▪
Equity price risks result from exposures to changes in
prices and volatilities of individual equities, equity baskets
and equity indices.
▪
Currency rate risks result from exposures to changes in spot
prices, forward prices and volatilities of currency rates.
▪
Commodity price risks result from exposures to changes in
spot prices, forward prices and volatilities of commodities,
such as electricity, natural gas, crude oil, petroleum
products, and precious and base metals.
We seek to manage these risks by diversifying exposures,
controlling position sizes and establishing economic hedges
in related securities or derivatives. For example, we may seek
to hedge a portfolio of common stocks by taking an offsetting
position in a related equity-index futures contract. The ability
to manage an exposure may, however, be limited by adverse
changes in the liquidity of the security or the related hedge
instrument and in the correlation of price movements between
the security and related hedge instrument.
In addition to applying business judgment, senior management
uses a number of quantitative tools to manage our exposure
to market risk for “Trading assets, at fair value” and “Trading
liabilities, at fair value” in the consolidated statements of
 nancial condition. These tools include:
▪
risk limits based on a summary measure of market risk
exposure referred to as VaR;
▪
scenario analyses, stress tests and other analytical tools
that measure the potential effects on our trading net
revenues of various market events, including, but not
limited to, a large widening of credit spreads, a substantial
decline in equity markets and signi cant moves in selected
emerging markets; and
▪
inventory position limits for selected business units.
VaR
VaR is the potential loss in value of trading positions due to
adverse market movements over a de ned time horizon with a
speci ed con dence level.
For the VaR numbers reported below, a one-day time horizon
and a 95% con dence level were used. This means that there is
a 1 in 20 chance that daily trading net revenues will fall below
the expected daily trading net revenues by an amount at least
as large as the reported VaR. Thus, shortfalls from expected
Goldman Sachs 2009 Annual Report
68
Management’s Discussion and Analysis