Morgan Stanley 2014 Annual Report Download - page 183

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
notes is determined using valuation models for the derivative and debt portions of the notes. These
models incorporate observable inputs referencing identical or comparable securities, including prices to
which the notes are linked, interest rate yield curves, option volatility and currency, and commodity or
equity prices. Independent, external and traded prices for the notes are considered as well. The impact of
the Company’s own credit spreads is also included based on the Company’s observed secondary bond
market spreads. Most structured notes are categorized in Level 2 of the fair value hierarchy.
Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase.
• The fair value of a reverse repurchase agreement or repurchase agreement is computed using a standard
cash flow discounting methodology. The inputs to the valuation include contractual cash flows and
collateral funding spreads, which are estimated using various benchmarks, interest rate yield curves
and option volatilities. In instances where the unobservable inputs are deemed significant, reverse
repurchase agreements and repurchase agreements are categorized in Level 3 of the fair value hierarchy;
otherwise, they are categorized in Level 2 of the fair value hierarchy.
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