Bank of America 2012 Annual Report Download - page 266

264 Bank of America 2012
Quantitative Information about Level 3 Fair Value Measurements (continued)
(Dollars in millions) Inputs
Financial Instrument
Fair
Value Valuation Technique
Significant Unobservable
Inputs Ranges of Inputs
Net derivatives assets
Credit derivatives $ 2,327
Discounted cash flow,
Stochastic recovery
correlation model
Yield 2% to 25%
Credit spreads 58 bps to 615 bps
Upfront points 25 points to 99 points
Spread to index -2,080 bps to 1,972 bps
Credit correlation 19% to 75%
Prepayment speed 3% to 30% CPR
Default rate 0% to 8% CDR
Loss severity 25% to 42%
Equity derivatives $ (1,295) Industry standard
derivative pricing (4)
Equity correlation 30% to 97%
Long-dated volatilities 20% to 70%
Commodity derivatives $ (5) Discounted cash flow Long-term natural gas basis -$0.30 to $0.30
Interest rate derivatives $ 441
Industry standard
derivative pricing (4)
Correlation (IR/IR) 15% to 99%
Correlation (FX/IR) -65% to 50%
Long-dated inflation rates 2% to 3%
Long-dated inflation volatilities 0% to 1%
Long-dated volatilities (FX) 5% to 36%
Long-dated swap rates 8% to 10%
Total net derivative assets $ 1,468
(4) Includes models such as Monte Carlo simulation, Black-Scholes and other methods that model the joint dynamics of interest, inflation and foreign exchange rates.
CPR = Constant Prepayment Rate
CDR = Constant Default Rate
IR = Interest Rate
FX = Foreign Exchange
In the tables above, instruments backed by residential and
commercial real estate assets include RMBS, CMBS, whole loans,
mortgage CDOs and net monoline exposure. Commercial loans,
debt securities and other includes corporate CLOs and CDOs,
commercial loans and bonds, and securities backed by non-real
estate assets. Structured liabilities primarily includes equity-linked
notes that are accounted for under the fair value option.
In addition to the instruments in the tables above, the
Corporation holds $1.2 billion of instruments consisting primarily
of certain direct private equity investments and private equity funds
that are classified as Level 3 and reported within other assets.
Valuations of direct private equity investments are based on the
most recent company financial information. Inputs generally
include market and acquisition comparables, entry level multiples,
as well as other variables. The Corporation selects a valuation
methodology (e.g., market comparables) for each investment and,
in certain instances, multiple inputs are weighted to derive the
most representative value. Discounts are applied as appropriate
to consider the lack of liquidity and marketability versus publicly-
traded companies. For private equity funds, fair value is determined
using the net asset value as provided by the individual fund’s
general partner.
For information on the inputs and techniques used in the
valuation of MSRs, see Note 24 – Mortgage Servicing Rights.
The Corporation uses multiple market approaches in valuing
certain of its Level 3 financial instruments. For example, market
comparables and discounted cash flows are used together. For a
given product, such as corporate debt securities, market
comparables may be used to estimate some of the unobservable
inputs and then these inputs are incorporated into a discounted
cash flow model. Therefore, the balances disclosed encompass
both of these techniques.
The level of aggregation and diversity within the products
disclosed in the table result in certain ranges of inputs being wide
and unevenly distributed across asset and liability categories.
For credit derivatives, the range of credit spreads represents
positions with varying levels of default risk to the underlying
instruments. The lower end of the credit spread range typically
represents shorter-dated instruments and those with better
perceived credit risk. The higher end of the range comprises longer-
dated instruments and those referencing debt issuances that are
more likely to be impaired or nonperforming. The majority of inputs
are concentrated in the lower end of the range. Similarly, the spread
to index can vary significantly based on the risk of the instrument.
The spread will be positive for instruments that have a higher risk
of default than the index (which is based on a weighted average
of its components) and negative for instruments that have a lower
risk of default than the index. Inputs are distributed evenly
throughout the range for spread to index. For yield and credit
correlation, the majority of the inputs are concentrated in the center
of the range. Inputs are concentrated in the middle to lower end
of the range for upfront points. The range for loss severity reflects
exposures that are concentrated in the middle to upper end of the
range while the ranges for prepayment speed and default rates
reflect exposures that are concentrated in the lower end of the
range.
For equity derivatives, including those embedded in long-term
debt, the range for equity correlation represents exposure primarily
concentrated toward the upper end of the range. The range for
long-dated volatilities represents exposure primarily concentrated
toward the lower end of the range.
For interest rate derivatives, the diversity in the portfolio is
reflected in wide ranges of inputs because the variety of currencies
and tenors of the transactions requires the use of numerous
foreign exchange and interest rate curves. Since foreign exchange