ANNUAL REPORT 2009 - GAM Holding AG

23B FINANCIAL INSTRUMENTS – FAIR VALUE DETERMINATION
For listed financial investments available-for-sale as well as for exchange-traded derivatives and other financial instruments whose prices are
quoted in an active market, the fair value is determined directly from the quoted market prices.
For financial instruments for which quoted market prices are not directly available, fair values are estimated using valuation techniques or
models based wherever possible on assumptions supported by observable market prices or rates existing on the balance sheet date. This is the
case for the majority of OTC derivatives, most unlisted financial instruments, and other items that are not traded in active markets. The main
pricing models and valuation techniques applied include forward pricing and swap models using present-value calculations, and option models
such as the Black-Scholes models or generalisations of that model. The values derived from applying these models and techniques are
significantly impacted by the choice of the valuation model used and the underlying assumptions made, such as the amounts and timing of
future cash flows, discount rates, volatility, or credit risk.
The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into
Levels 1 to 3 based on the degree to which the fair value is observable.
- Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities.
- Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the
asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
- Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3.
Specific valuation techniques used to value financial instruments include:
- Quoted market prices or dealer quotes for similar instruments.
- The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves.
- The fair value of forward foreign exchange contracts is determined using forward exchange rates at the balance sheet date, with the resulting
value discounted back to present value.
- Other techniques, such as discounted cash flow analysis, are used to determine fair value for the remaining financial instruments.
For a small portion of financial instruments, neither quoted market prices nor valuation techniques or models based on observable market prices
are available for determining the fair value. In these cases, fair value is estimated indirectly using valuation techniques or models based on
reasonable assumptions reflecting market conditions.
90 GAM Holding Ltd. Annual Report 2009