Morgan Stanley 2010 Annual Report Download - page 101

At December 31, 2010, the Company calculated its RWAs in accordance with the regulatory capital requirements
of the Federal Reserve, which is consistent with guidelines described under Basel I. RWAs reflect both on and
off-balance sheet risk of the Company. The risk capital calculations will evolve over time as the Company
enhances its risk management methodology and incorporates improvements in modeling techniques while
maintaining compliance with the regulatory requirements and interpretations.
Market RWAs reflect capital charges attributable to the risk of loss resulting from adverse changes in market
prices and other factors. For a further discussion of the Company’s market risks and Value-at-Risk (“VaR”)
model, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management” in Part II, Item 7A
herein. Market RWAs incorporate two components: systematic risk and specific risk. Systematic and specific risk
charges are computed using either the Company’s VaR model or Standardized Approach in accordance with
regulatory requirements.
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.
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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