Morgan Stanley 2009 Annual Report Download - page 92

(“IDR”). Systematic and specific risk charges are computed using either a Standardized Approach (applying a
fixed percentage to the fair value of the assets) or the Company’s VaR model. Capital charges related to IDR are
calculated using an IDR model that estimates the loss due to sudden default events affecting traded financial
instruments at a 99.9% confidence level. The Company received permission from the Fed for the use of its
market risk models through calendar year 2009 while undergoing the Fed’s review. Based on the final outcome
of that review, the capital ratios may be lower or higher in 2010.
Credit RWAs reflect capital charges attributable to the risk of loss arising from a borrower or counterparty failing
to meet its financial obligations. For a further discussion of the Company’s credit risks, see “Quantitative and
Qualitative Disclosures about Market Risk—Credit Risk” in Part II, Item 7A, herein. Credit RWAs are
determined using Basel I regulatory capital guidelines for U.S. banking organizations issued by the Fed.
Effects of Inflation and Changes in Foreign Exchange Rates.
The Company’s assets to a large extent are liquid in nature and, therefore, are not significantly affected by
inflation, although inflation may result in increases in the Company’s expenses, which may not be readily
recoverable in the price of services offered. To the extent inflation results in rising interest rates and has other
adverse effects upon the securities markets and upon the value of financial instruments, it may adversely affect
the Company’s financial position and profitability.
A significant portion of the Company’s business is conducted in currencies other than the U.S. dollar, and
changes in foreign exchange rates relative to the U.S. dollar can therefore affect the value of non-U.S. dollar net
assets, revenues and expenses. Potential exposures as a result of these fluctuations in currencies are closely
monitored, and, where cost-justified, strategies are adopted that are designed to reduce the impact of these
fluctuations on the Company’s financial performance. These strategies may include the financing of non-U.S.
dollar assets with direct or swap-based borrowings in the same currency and the use of currency forward
contracts or the spot market in various hedging transactions related to net assets, revenues, expenses or cash
flows.
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