NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table provides the fair value of our derivative financial instr uments portfolio: 2002 2001 Customer Customer trading ALM Total trading ALM Total Gross Gross Gr oss Gross assets liabilities Net as se ts liabilities Net Net Net Net Net Interest Rate Contracts Swaps $ 14,277 $ (14,260) $  17 918 $ (570) $ 348 $  365 $ (856) $ 315  $ (541) Forward rate agreements 211 (290) (79) — — — (79) 21  — 21  Futures 17 (2) 15 — — — 15 7  — 7  Purchased options 2,515 — 2,515 4 — 4 2,519 2,320 1 2,321 Written options — (2,138) (2,138) — — — (2,138) (1,815) — (1,815) Foreign Exchange Contracts Cross-currency swaps 287 (404) (117) — — — (117) (261) — (261) Cross-currency interest rate swaps  811 (955) (144) 6 (99) (93) (237) (389) (97) (486) Forward foreign exchange contracts 1,007 (1,254) (247) 22 (32) (10) (257) 497 1 498 Futures — — — — — — — — — — Purchased options 801 — 801 — — — 801 612  — 612 Written options — (773) (773) — — — (773) (661) — (661) Commodity Contracts Swaps 860 (948) (88) — — — (88) (1) — (1) Futures — — — — — — — — — — Purchased options 820 — 820 — — — 820 2,587  — 2,587  Written options — (776) (776) — — — (776) (2,412) — (2,412) Equity Contracts 320 (152) 168 — 13 13 181 63 26 89 Credit Contracts 6 (6) — — — — — — — — Total Fair Value $ 21,932 $ (21,958) $  (26) 950 $ (688) $ 262 $  236 $ (288) $ 246  $ (42) Total Book Value $ 21,932 $ (21,958) $  (26) 176 $ (168) $  8 $  (18) $ (288) $ (43) $ (331) Average Fair Value $ 21,407 $ (21,665) $ (258) 774 $ (643) $ 131 $ (127) $ 482 $ (154) $ 328 In order to calculate fair values: b Instruments are marked to market using quoted market rates and/or zero coupon valuation techniques. b Zero coupon curves are created using generally accepted valuation techniques from underlying instruments such as cash, bonds, futures and off-balance sheet prices observable in the market. b Option implied volatilities are either obtained directly from market sources or calculated from market prices utilizing the appropriate option pricing models given our assessment and market conventions. Assets are shown net of liabilities to customers where we have an enforceable right to offset amounts and we intend to settle contracts on a net basis. As a financial institution, we record trading assets at market values and non-trading assets and liabilities at their original amortized cost less allowances or write-downs for impairment. Fair value is subjective in nature, requiring a variety of valuation techniques and assumptions. The values are based upon the estimated amounts for individual assets and liabilities and do not include an estimate of the fair value of any of our legal entities or underlying operations that comprise our business. Premises and equipment are not financial instruments and have been excluded from our estimate of fair value. The net amounts excluded totalled $2,159 as at October 31, 2002 and $2,170 as at October 31, 2001. Fair value amounts disclosed represent point-in-time estimates that may change in subsequent reporting periods due to market conditions or other factors. Fair value generally represents our  estimate of the amounts we could exchange the financial instru- ments for with third parties who were interested in acquiring the instruments. In most cases, however, the financial instruments are not typically exchangeable or exchanged and therefore it is difficult to determine their fair value. In those cases, we have estimated fair value assuming that we will not sell the assets or liabilities, taking into account only changes in interest rates and credit risk that have occurred since we acquired them or entered into a contract. These calculations represent management’s best estimates based on a range of methodologies and assumptions; since they involve uncertainties, the results may not be realized in an actual sale or immediate settle- ment of the instruments. Interest rate changes are the main cause of change in the fair value of our financial instruments. The adjusted amount of our loan balances determined based on the above assumptions is further reduced by the allowance for credit losses to determine the fair value of our loan portfolio. Fair value is assumed to equal book value for acceptance assets  and liabilities, securities sold but not yet purchased and securities sold under repurchase agreements. This is based on the short-term nature of these assets and liabilities. Fair value is also assumed to equal book value for our other assets and other liabilities. In determining the fair value of our loans, we incorporate the fol- lowing assumptions: Determination of Fair Value Loans NOTE 24 Fair Value of Financial Instruments b For fixed rate performing loans, we discount the remaining con- tractual cash flows at market interest rates currently charged for loans with similar terms and risks. b For floating rate performing loans, changes in interest rates have minimal impact on fair value since loans reprice to market fre- quently. On that basis, fair value is assumed to equal book value. 90 BMO FINANCIAL GROUP ANNUAL REPORT 2002