Morgan Stanley 2014 Annual Report Download - page 199

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
•Interest rate curve—the term structure of interest rates (relationship between interest rates and the time to
maturity) and a market’s measure of future interest rates at the time of observation. An interest rate curve
is used to set interest rate and foreign exchange derivative cash flows and is a pricing input used in the
discounting of any OTC derivative cash flow.
•Price / Book ratio—the ratio used to compare a stock’s market value with its book value. The ratio is
calculated by dividing the current closing price of the stock by the latest book value per share. This
multiple allows comparison between companies from an operational perspective.
•Price / Earnings ratio—the ratio used to measure a company’s equity value in relation to its earnings.
The ratio is calculated by dividing the equity value per share by the latest historical or forward-looking
earnings per share. The ratio results in a standardized metric that allows comparison between companies,
after also considering the effects of different leverage ratios and taxation rates.
•Volatility—the measure of the variability in possible returns for an instrument given how much that
instrument changes in value over time. Volatility is a pricing input for options and, generally, the lower
the volatility, the less risky the option. The level of volatility used in the valuation of a particular option
depends on a number of factors, including the nature of the risk underlying that option (e.g., the volatility
of a particular underlying equity security may be significantly different from that of a particular
underlying commodity index), the tenor and the strike price of the option.
•Volatility skew—the measure of the difference in implied volatility for options with identical underliers
and expiry dates but with different strikes. The implied volatility for an option with a strike price that is
above or below the current price of an underlying asset will typically deviate from the implied volatility
for an option with a strike price equal to the current price of that same underlying asset.
Fair Value of Investments That Calculate Net Asset Value.
The Company’s Investments measured at fair value were $6,651 million and $8,013 million at December 31,
2014 and December 31, 2013, respectively. The following table presents information solely about the Company’s
investments in private equity funds, real estate funds and hedge funds measured at fair value based on NAV at
December 31, 2014 and December 31, 2013, respectively:
At December 31, 2014 At December 31, 2013
Fair Value
Unfunded
Commitment Fair Value
Unfunded
Commitment
(dollars in millions)
Private equity funds .................................. $2,569 $613 $2,531 $559
Real estate funds .................................... 1,753 112 1,643 124
Hedge funds(1):
Long-short equity hedge funds ..................... 433 — 469 —
Fixed income/credit-related hedge funds ............. 76 — 82 —
Event-driven hedge funds ......................... 39 — 38 —
Multi-strategy hedge funds ........................ 139 3 220 3
Total .............................................. $5,009 $728 $4,983 $686
(1) Fixed income/credit-related hedge funds, event-driven hedge funds and multi-strategy hedge funds are redeemable at least on a three-
month period basis, primarily with a notice period of 90 days or less. At December 31, 2014, approximately 36% of the fair value
amount of long-short equity hedge funds was redeemable at least quarterly, 47% is redeemable every six months and 17% of these funds
have a redemption frequency of greater than six months. At December 31, 2013, approximately 42% of the fair value amount of long-
short equity hedge funds was redeemable at least quarterly, 42% is redeemable every six months and 16% of these funds have a
redemption frequency of greater than six months. The notice period for long-short equity hedge funds at December 31, 2014 and
December 31, 2013 was primarily greater than six months.
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