Morgan Stanley 2014 Annual Report Download - page 197

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Balance at
December 31,
2013
(dollars in
millions) Valuation Technique(s)
Significant Unobservable Input(s) /
Sensitivity of the Fair Value to Changes
in the Unobservable Inputs Range(1) Averages(2)
Investments(4):
Principal investments 2,160 Discounted cash flow Implied weighted average cost of
capital / (C)(D) 12% 12%
Exit multiple / (A)(D) 9 times 9 times
Discounted cash flow(3) Capitalization rate / (C)(D) 5 to 13% 7%
Equity discount rate / (C)(D) 10 to 30% 21%
Market approach EBITDA multiple / (A) 5 to 6 times 5 times
Other 538 Discounted cash flow Implied weighted average cost of
capital / (C)(D) 7 to 10% 8%
Exit multiple / (A)(D) 7 to 9 times 9 times
Market approach(3) EBITDA multiple / (A) 8 to 14 times 10 times
Liabilities
Securities sold under
agreements to repurchase $ 154 Discounted cash flow Funding spread / (A) 92 to 97 basis points 95 basis points
Other secured financings 278 Comparable pricing(3) Comparable bond price / (A) 99 to 102 points 101 points
Discounted cash flow Funding spread / (A) 97 basis points 97 basis points
Long-term borrowings 1,887 Option model At the money volatility / (C)(D) 20 to 33% 26%
Volatility skew / (A)(D) -2 to 0% 0%
Equity—Equity correlation / (A)(D) 50 to 70% 69%
Equity—Foreign exchange
correlation / (C)(D) -60 to 0% -23%
(1) The ranges of significant unobservable inputs are represented in points, percentages, basis points, times or megawatt hours. Points are a
percentage of par; for example, 93 points would be 93% of par. A basis point equals 1/100th of 1%; for example, 487 basis points would
equal 4.87%.
(2) Amounts represent weighted averages except where simple averages and the median of the inputs are provided (see footnote 6 below).
Weighted averages are calculated by weighting each input by the fair value of the respective financial instruments except for long-term
borrowings and derivative instruments where inputs are weighted by risk.
(3) This is the predominant valuation technique for this major asset or liability class.
(4) Investments in funds measured using an unadjusted NAV are excluded.
(5) CVA is included in the balance, but excluded from the Valuation Technique(s) and Significant Unobservable Input(s) in the table above.
CVA is deemed to be a Level 3 input when the underlying counterparty credit curve is unobservable.
(6) The data structure of the significant unobservable inputs used in valuing Interest rate contracts, Foreign exchange contracts and certain
Equity contracts may be in a multi-dimensional form, such as a curve or surface, with risk distributed across the structure. Therefore, a
simple average and median, together with the range of data inputs, may be more appropriate measurements than a single point weighted
average.
(7) Includes derivative contracts with multiple risks (i.e., hybrid products).
Sensitivity of the fair value to changes in the unobservable inputs:
(A) Significant increase (decrease) in the unobservable input in isolation would result in a significantly higher (lower) fair value
measurement.
(B) Significant changes in credit correlation may result in a significantly higher or lower fair value measurement. Increasing (decreasing)
correlation drives a redistribution of risk within the capital structure such that junior tranches become less (more) risky and senior
tranches become more (less) risky.
(C) Significant increase (decrease) in the unobservable input in isolation would result in a significantly lower (higher) fair value
measurement.
(D) There are no predictable relationships between the significant unobservable inputs.
The following provides a description of significant unobservable inputs included in the December 31, 2014 and
December 31, 2013 tables above for all major categories of assets and liabilities:
•Capitalization rate—the ratio between net operating income produced by an asset and its market value at
the projected disposition date.
•Cash synthetic basis—the measure of the price differential between cash financial instruments (“cash
instruments”) and their synthetic derivative-based equivalents (“synthetic instruments”). The range
disclosed in the table above signifies the number of points by which the synthetic bond equivalent price is
higher than the quoted price of the underlying cash bonds.
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