Morgan Stanley 1998 Annual Report Download - page 72

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changes in interest rates, foreign currency exchange rates or the fair
values of the financial instruments, commodities or indices under-
lying these contracts may ultimately result in cash settlements
exceeding fair value amounts recognized in the consolidated state-
ments of financial condition. Assets represent unrealized gains on
purchased exchange traded and OTC options and other contracts
(including interest rate, foreign exchange and other forward contracts
and swaps) net of any unrealized losses owed to the counterparties
on offsetting positions in situations where netting is appropriate.
Similarly, liabilities represent net amounts owed to counterparties.
These amounts will vary based on changes in the fair values of under-
lying financial instruments and/or the volatility of such
underlying instruments:
*SEVENTY
-SIX *
MORGAN STANLEY DEAN WITTER *1998 ANNUAL REPORT
The gross notional or contract amounts of these instruments are indica-
tive of the Company’s degree of use of derivatives for trading purposes
but do not represent the Company’s exposure to market or credit risk.
Credit risk arises from the failure of a counterparty to perform accord-
ing to the terms of the contract. The Company’s exposure to credit
risk at any point in time is represented by the fair value of the con-
tracts reported as assets. These amounts are presented on a net-by-
counterparty basis when appropriate, but are not reported net of
collateral, which the Company obtains with respect to certain of these
transactions to reduce its exposure to credit losses. The Company mon-
itors the creditworthiness of counterparties to these transactions on
an ongoing basis and requests additional collateral when deemed nec-
essary. The Company believes the ultimate settlement of the trans-
actions outstanding at November 30, 1998 will not have a material
effect on the Company’s financial condition.
FISCAL YEAR-END
GROSS NOTIONAL/CONTRACT AMOUNT(1)(2) FISCAL YEAR-END FAIR VALUES(3) AVERAGE FAIR VALUES(3)(4)
(dollars in billions at fiscal year-end) Assets Liabilities Assets Liabilities
1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
Interest rate and currency swaps and
options (including caps, floors and
swap options) and other fixed
$1,719 $1,262 income securities contracts $10.1 $ 7.1 $10.4 $ 6.4 $ 9.5 $ 4.8 $ 8.6 $ 5.9
Foreign exchange forward and futures
903 1,035 contracts and options 3.7 4.6 4.1 4.2 4.6 3.4 4.4 3.2
Equity securities contracts (including
equity swaps, futures contracts, and
107 112 warrants and options) 5.2 3.8 4.8 3.8 4.8 2.6 4.6 2.6
Commodity forwards, futures, options
91 78 and swaps 2.2 1.3 1.9 1.2 2.0 1.1 1.7 0.9
Mortgage-backed securities forward
40 42 contracts, swaps and options 0.2 0.3 ——0.2 0.3 ——
$2,860 $2,529 Total $21.4 $17.1 $21.2 $15.6 $21.1 $12.2 $19.3 $12.6
(1) The notional amounts of derivatives have been adjusted to reflect the effects of leverage, where applicable.
(2) Notional amounts include purchased and written options of $485 billion and $442 billion, respectively, at November 30, 1998, and $572 billion and $549 billion, respectively, at
November 30, 1997.
(3)These amounts represent carrying value (exclusive of collateral) at November 30, 1998 and 1997, respectively, and do not include receivables or payables related to exchange traded futures contracts.
(4) Amounts are calculated using a monthly average.