Goldman Sachs 2012 Annual Report Download - page 120

Notes to Consolidated Financial Statements
Gains and Losses from Market Making and Other
Principal Transactions
The table below presents, by major product type, the firm’s
“Market making” and “Other principal transactions”
revenues. These gains/(losses) are primarily related to the
firm’s financial instruments owned, at fair value and
financial instruments sold, but not yet purchased, at fair
value, including both derivative and non-derivative
financial instruments. These gains/(losses) exclude related
interest income and interest expense. See Note 23 for
further information about interest income and
interest expense.
The gains/(losses) in the table are not representative of the
manner in which the firm manages its business activities
because many of the firm’s market-making, client
facilitation, and investing and lending strategies utilize
financial instruments across various product types.
Accordingly, gains or losses in one product type frequently
offset gains or losses in other product types. For example,
most of the firm’s longer-term derivatives are sensitive to
changes in interest rates and may be economically hedged
with interest rate swaps. Similarly, a significant portion of
the firm’s cash instruments and derivatives has exposure to
foreign currencies and may be economically hedged with
foreign currency contracts.
Year Ended December
in millions 2012 2011 2010
Interest rates $ 4,366 $ 1,557 $ (2,042)
Credit 5,506 2,715 8,679
Currencies (1,004) 901 3,219
Equities 5,802 2,788 6,862
Commodities 575 1,588 1,567
Other 1,968 11,245 2,325
Total $17,213 $10,794 $20,610
1. Includes a gain of approximately $500 million on the sale of the firm’s hedge
fund administration business, which is included in “Market making”
revenues.
Note 5.
Fair Value Measurements
The fair value of a financial instrument is the amount that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market
participants at the measurement date. Financial assets are
marked to bid prices and financial liabilities are marked to
offer prices. Fair value measurements do not include
transaction costs. The firm measures certain financial assets
and financial liabilities as a portfolio (i.e., based on its net
exposure to market and/or credit risks).
The best evidence of fair value is a quoted price in an active
market. If quoted prices in active markets are not available,
fair value is determined by reference to prices for similar
instruments, quoted prices or recent transactions in less
active markets, or internally developed models that
primarily use market-based or independently sourced
parameters as inputs including, but not limited to, interest
rates, volatilities, equity or debt prices, foreign exchange
rates, commodity prices, credit spreads and funding spreads
(i.e., the spread, or difference, between the interest rate at
which a borrower could finance a given financial
instrument relative to a benchmark interest rate).
U.S. GAAP has a three-level fair value hierarchy for
disclosure of fair value measurements. The fair value
hierarchy prioritizes inputs to the valuation techniques used
to measure fair value, giving the highest priority to level 1
inputs and the lowest priority to level 3 inputs. A financial
instrument’s level in the fair value hierarchy is based on the
lowest level of input that is significant to its fair value
measurement.
The fair value hierarchy is as follows:
Level 1. Inputs are unadjusted quoted prices in active
markets to which the firm had access at the measurement
date for identical, unrestricted assets or liabilities.
Level 2. Inputs to valuation techniques are observable,
either directly or indirectly.
Level 3. One or more inputs to valuation techniques are
significant and unobservable.
118 Goldman Sachs 2012 Annual Report