Morgan Stanley 1999 Annual Report Download - page 53

page 51 |99 AR
The table below presents the high, low and average 99%/
one-day VaR over the course of fiscal 1999 for substantially all of the
Company’s institutional trading activities. This measure of VaR incor-
porates most of the Company’s trading-related market risks. Certain
market risks included in the year-end VaR discussed above are
excluded from this measure (i.e., equity price risk in private equity
positions and funding liabilities related to trading positions).
DAILY 99%/ONE-DAY VaR
PRIMARY MARKET RISK CATEGORY FOR FISCAL 1999
(dollars in millions, pre-tax) HIGH LOW AVERAGE
Interest rate $62 $17 $29
Equity price 38 14 21
Foreign exchange rate 13 2 5
Commodity price 19 6 11
Aggregate Value-at-Risk $60 $27 $36
The histogram below presents the Company’s daily 99%/one-day VaR
for its institutional trading activities during fiscal 1999:
The histogram below shows the distribution of daily rev-
enues during fiscal 1999 for the Company’s institutional trading
businesses (net of interest expense and including commissions and
primary revenue credited to the trading businesses):
The Company evaluates the reasonableness of its VaR
model by comparing the potential declines in portfolio values gen-
erated by the model with actual trading results. There were no days
during fiscal 1999 in which the Company incurred daily mark-to-
market losses (trading revenue net of interest income and expense
and excluding commissions and primary revenue credited to the
trading businesses) in its institutional trading business in excess of
the 99%/one-day VaR which incorporates the enhancements to the
Company’s VaR model made during fiscal 1999.
CONSUMER LENDING AND RELATED ACTIVITIES
Interest Rate Risk and Management
In its consumer lending activities, the Company is exposed to mar-
ket risk primarily from changes in interest rates. Such changes in
interest rates impact interest earning assets, principally credit card
and other consumer loans and net servicing fees received in con-
nection with consumer loans sold through asset securitizations, as
well as the interest-sensitive liabilities which finance these assets,
including asset securitizations, commercial paper, medium-term
notes, long-term borrowings, deposits, asset-backed commercial
paper, Federal Funds and short-term bank notes.
The Company’s interest rate risk management policies are
designed to reduce the potential volatility of earnings which may
arise from changes in interest rates. This is accomplished primarily
by matching the repricing of credit card and consumer loans and
the related financing. To the extent that asset and related financ-
ing repricing characteristics of a particular portfolio are not
matched effectively, the Company utilizes interest rate derivative
contracts, such as swap, cap and collar agreements, to achieve its
matched financing objectives. Interest rate swap agreements effec-
tively convert the underlying asset or financing from fixed to vari-
able repricing, from variable to fixed repricing or, in more limited
circumstances, from variable to variable repricing. Interest rate cap
agreements effectively establish a maximum interest rate on certain
variable rate financings. Interest rate collar agreements effectively
establish a range of interest rates on certain variable rate financings.
Sensitivity Analysis Methodology, Assumptions and Limitations
For its consumer lending activities, the Company uses a variety of
techniques to assess its interest rate risk exposure, one of which
is interest rate sensitivity simulation. For purposes of presenting
the possible earnings effect of a hypothetical, adverse change in
Number of Days
50
45
40
35
30
25
20
15
10
5
<28 32 36 40 44 52 5648 >58
Number of Days
25
20
15
10
5
0<-5
(loss) 5 10152025303540455055>60 gain
HISTOGRAM OF DAILY 99% / ONE-DAY VaR
(in millions of U.S. dollars)
HISTOGRAM OF DAILY INSTITUTIONAL TRADING REVENUES
(in millions of U.S. dollars)