Balance Sheet at 31 December 2010 of BBVA

Translation of financial statements originally issued in Spanish and prepared in accordance with generally accounting principles Spain (See Note 1 and 54). In the event of a discrepancy, the Spanishlanguage
version prevails.
Financial Instruments
LEVEL 3
Valuation techniques
Main assumptions
Main unobservable
inputs
2010
Fair value (Millions of Euros)
Calculation of the present value of financial instruments as the current value of future
cash flows (discounted at market interest rates), taking into account:
Trading portfolio
• Estimate of prepayment rates;
• Present-value method; and
• Issuer credit risk; and
• Prepayment rates.
Debt securities 505
• Debt securities
• “Time default” model for financial
instruments in the collateralized
debt obligations (CDOs) family
• Current market interest rates.
• Default correlation.
• Credit spread (1)
Equity instruments 134
In the case of valuation of asset-backed securities (ABSs), future prepayments are
calculated on the conditional prepayment rates that the issuers themselves provide.
Available-for-sale financial assets
• Equity instruments
• Net asset value (NAV) for hedge
funds and for equity instruments
listed in thin and less active
markets
The “time-to-default” model uses a Gaussian copula to measure default probability. One
of the main variables used is the correlation of defaults extrapolated from several index
tranches (ITRAXX and CDX) with the underlying portfolio of our CDOs, using the
expected loss as the basis.
• Credit spread. (1)
Debt securities 228
• NAV supplied by the
fund manager. Equity instruments 169
Trading derivatives for interest rate
futures and forwards:
• Present-value method.
• “Libor Market” model.
The “Libor Market” model models the complete term structure of the interest rate curve,
assuming a multidimensional CEV (constant elasticity of variance) lognormal process for
forward interest rates. The CEV lognormal process is used to measure the presence of
a volatility shift.
• Correlation decay. (2)
ASSETS
Trading derivatives 160
• Derivatives
For variable income and foreign
exchange options:
• Vol-of-vol (3)
• Monte Carlo simulations
• Numerical integration
• Heston
The options are valued through generally accepted valuation models, to which the
observed implied volatility is added.
• Reversion factor. (4)
• Volatility
Spot
Correlation. (5)
LIABILITIES
• Credit baskets These models assume a constant diffusion of default intensity. • Defaults correlation. Trading derivatives 25
(1) Credit spread: The spread between the interest rate of a risk-free asset (e.g. Treasury securities) and the interest rate of any other security that is identical in every respect except for quality rating. Spreads are considered as Level 3 inputs when referring to
illiquid issues. Based on spreads of similar entities.
(2) Correlation decay: The constant rate of decay that allows us to calculate how the correlation evolves between the different pairs of forward rates.
(3) Vol-of-Vol: Volatility of implicit volatility. This is a statistical measure of the changes of the spot volatility.
(4) Reversion Factor: The speed with which volatility reverts to its mean.
(5) Volatility- Spot Correlation: A statistical measure of the linear relationship (correlation) between the spot price of a security and its volatility.
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