Goldman Sachs 2012 Annual Report Download - page 135

Notes to Consolidated Financial Statements
Range of Significant Unobservable Inputs
The following provides further information about the
ranges of unobservable inputs used to value the firm’s
level 3 derivative instruments.
‰Correlation: Ranges for correlation cover a variety of
underliers both within one market (e.g., equity index and
equity single stock names) and across markets (e.g.,
correlation of a commodity price and a foreign exchange
rate), as well as across regions. Generally, cross-asset
correlation inputs are used to value more complex
instruments and are lower than correlation inputs on
assets within the same derivative product type.
‰Volatility: Ranges for volatility cover numerous
underliers across a variety of markets, maturities and
strike prices. For example, volatility of equity indices is
generally lower than volatility of single stocks.
‰Credit spreads and recovery rates: The ranges for credit
spreads and recovery rates cover a variety of underliers
(index and single names), regions, sectors, maturities and
credit qualities (high-yield and investment-grade). The
broad range of this population gives rise to the width of
the ranges of unobservable inputs.
‰Commodity prices and spreads: The ranges for
commodity prices and spreads cover variability in
products, maturities and locations, as well as peak and
off-peak prices.
Sensitivity of Fair Value Measurement to Changes
in Significant Unobservable Inputs
The following provides a description of the directional
sensitivity of the firm’s level 3 fair value measurements to
changes in significant unobservable inputs, in isolation.
Due to the distinctive nature of each of the firm’s level 3
derivatives, the interrelationship of inputs is not necessarily
uniform within each product type.
‰Correlation: In general, for contracts where the holder
benefits from the convergence of the underlying asset or
index prices (e.g., interest rates, credit spreads, foreign
exchange rates, inflation rates and equity prices), an
increase in correlation results in a higher fair
value measurement.
‰Volatility: In general, for purchased options an increase in
volatility results in a higher fair value measurement.
‰Credit spreads and recovery rates: In general, the fair
value of purchased credit protection increases as credit
spreads increase or recovery rates decrease. Credit
spreads and recovery rates are strongly related to
distinctive risk factors of the underlying reference
obligations, which include reference entity-specific
factors such as leverage, volatility and industry,
market-based risk factors, such as borrowing costs or
liquidity of the underlying reference obligation, and
macro-economic conditions.
‰Commodity prices and spreads: In general, for contracts
where the holder is receiving a commodity, an increase in
the spread (price difference from a benchmark index due
to differences in quality or delivery location) or price
results in a higher fair value measurement.
Goldman Sachs 2012 Annual Report 133