Morgan Stanley 2014 Annual Report Download - page 134

that are carried at fair value and associated hedges. Additionally, the Company’s Management VaR excludes
certain risks contained in its Regulatory VaR, such as hedges to counterparty exposures related to the Company’s
own credit spread.
Table 1 below presents the Management VaR for the Company’s Trading portfolio, on a period-end, annual
average and annual high and low basis. The Credit Portfolio is disclosed as a separate category from the Primary
Risk Categories, and includes counterparty credit valuation adjustments and related hedges, as well as loans that
are carried at fair value and associated hedges.
Trading Risks.
The table below presents the Company’s 95%/one-day Management VaR:
Table 1: 95% Management VaR 95%/One-Day VaR for 2014 95%/One-Day VaR for 2013
Market Risk Category
Period
End Average High Low
Period
End Average High Low
(dollars in millions)
Interest rate and credit spread ............. $31 $31 $44 $25 $41 $45 $76 $31
Equity price ........................... 18 18 26 15 22 19 43 15
Foreign exchange rate ................... 10 11 17 6 15 14 22 7
Commodity price ...................... 15 17 24 12 15 21 31 15
Less: Diversification benefit(1)(2) ......... (30) (34) N/A N/A (44) (46) N/A N/A
Primary Risk Categories ................. $44 $43 $53 $34 $49 $53 $78 $42
Credit Portfolio ........................ 15 11 15 9 12 14 18 12
Less: Diversification benefit(1)(2) ......... (14) (7) N/A N/A (8) (8) N/A N/A
Total Management VaR ................. $45 $47 $58 $38 $53 $59 $85 $47
N/A—Not Applicable
(1) Diversification benefit equals the difference between the total Management VaR and the sum of the component VaRs. This benefit arises
because the simulated one-day losses for each of the components occur on different days; similar diversification benefits also are taken
into account within each component.
(2) The high and low VaR values for the total Management VaR and each of the component VaRs might have occurred on different days
during the year, and therefore, the diversification benefit is not an applicable measure.
The Company’s average Management VaR for the Primary Risk Categories for 2014 was $43 million compared
with $53 million for 2013. The decrease was primarily driven by reduced exposure to credit spread and
commodity products.
The Company’s average Total Management VaR for 2014 was $47 million compared with $59 million for 2013.
This decrease was driven by the reduced risk in Primary Risk Categories.
Distribution of VaR Statistics and Net Revenues for 2014.
One method of evaluating the reasonableness of the Company’s VaR model as a measure of the Company’s
potential volatility of net revenues is to compare the VaR with actual trading revenues. Assuming no intraday
trading, for a 95%/one-day VaR, the expected number of times that trading losses should exceed VaR during the
year is 13, and, in general, if trading losses were to exceed VaR more than 21 times in a year, the adequacy of the
VaR model would be questioned. The Company evaluates the reasonableness of its VaR model by comparing the
potential declines in portfolio values generated by the model with actual trading results for the Company, as well
as individual business units. For days where losses exceed the VaR statistic, the Company examines the drivers
of trading losses to evaluate the VaR model’s accuracy relative to realized trading results.
The distribution of VaR Statistics and Net Revenues is presented in the histograms below for both the Primary
Risk Categories and the Total Trading populations.
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