Goldman Sachs 2009 Annual Report Download - page 71

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The following tables set forth the daily VaR:
Average Daily VaR
(1)
(in millions) Year Ended
December November November
Risk Categories 2009 2008 2007
Interest rates $176 $ 142 $ 85
Equity prices 66 72 100
Currency rates 36 30 23
Commodity prices 36 44 26
Diversi cation effect
(2)
(96) (108) (96)
Total $218 $ 180 $138
(1) Certain portfolios and individual positions are not included in VaR, where VaR is not the most appropriate measure of risk (e.g.,due to transfer restrictions
and/or illiquidity). See “— Other Market Risk Measures” below.
(2) Equals the difference between total VaR and the sum of the VaRs for the four risk categories. This effect arises because the four market risk categories are
notperfectly correlated.
Our average daily VaR increased to $218million in 2009 from $180million in 2008, principally due to an increase in the interest
rates category and a reduction in the diversi cation bene t across risk categories, partially offset by a decrease in the commodity
prices category. The increase in interest rates was primarily due to wider spreads. The decrease in commodity prices was primarily
due to lower energy prices.
Our average daily VaR increased to $180million in 2008 from $138million in 2007, principally due to increases in the interest
rate, commodity price and currency rate categories, partially offset by a decrease in the equity prices category. The increase in
interest rates was primarily due to higher levels of volatility and wider spreads, partially offset by position reductions, and the
increases in commodity prices and currency rates were primarily due to higher levels of volatility. The decrease in equity prices
was principally due to position reductions, partially offset by higher levels of volatility.
trading net revenues on a single trading day greater than the reported VaR would be anticipated to occur, on average, about once
a month. Shortfalls on a single day can exceed reported VaR by signi cant amounts. Shortfalls can also occur more frequently or
accumulate over a longer time horizon such as a number of consecutive trading days.
The modeling of the risk characteristics of our trading positions involves a number of assumptions and approximations. While
we believe that these assumptions and approximations are reasonable, there is no standard methodology for estimating VaR, and
different assumptions and/or approximations could produce materially different VaRestimates.
We use historical data to estimate our VaR and, to better re ect current asset volatilities, we generally weight historical data to
give greater importance to more recent observations. Given its reliance on historical data, VaR is most effective in estimating risk
exposures in markets in which there are no sudden fundamental changes or shifts in market conditions. An inherent limitation of VaR
is that the distribution of past changes in market risk factors may not produce accurate predictions of future market risk. Different
VaR methodologies and distributional assumptions could produce a materially different VaR. Moreover, VaR calculated for a one-day
time horizon does not fully capture the market risk of positions that cannot be liquidated or offset with hedges within one day.
Goldman Sachs 2009 Annual Report
69
Management’s Discussion and Analysis