Investor Presentaiton
MORGAN STANLEY BANK ASIA LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2020
3.
d.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair value (continued)
Fair value measurement (continued)
The availability of observable inputs can vary from product to product and is affected by a wide variety
of factors, including the type of product, whether the product is new and not yet established in the
marketplace, the liquidity of markets and other characteristics particular to the product. To the extent that
valuation is based on models or inputs that are less observable or unobservable in the market, the
determination of fair value requires more judgement. Accordingly, the degree of judgement exercised by
the Company in determining fair value is greatest for instruments categorised in Level 3 of the fair value
hierarchy.
The Company considers prices and inputs that are current as of the measurement date, including during
periods of market dislocation. In periods of market dislocation, the observability of prices and inputs
may be reduced for many instruments. This condition could cause an instrument to be reclassified from
Level 1 to Level 2 or from Level 2 to Level 3 of the fair value hierarchy.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, the total fair amount is disclosed in the level appropriate for the lowest level
input that is significant to the total fair value of the asset or liability.
For assets and liabilities that are transferred between levels in the fair value hierarchy during the period,
fair values are ascribed as if the assets or liabilities had been transferred as of the beginning of the period.
Valuation techniques
Many cash instruments and OTC derivative contracts have bid and ask prices that can be observed in the
marketplace. Bid prices reflect the highest price that a party is willing to pay for an asset. Ask prices
represent the lowest price that a party is willing to accept for an asset. The Company carries positions at
the point within the bid-ask range that meets its best estimate of fair value. For offsetting positions in the
same financial instrument, the same price within the bid-ask spread is used to measure both the long and
short positions.
Fair value for many cash instruments and OTC derivative contracts is derived using pricing models.
Pricing models take into account the contract terms, as well as multiple inputs including, where
applicable, commodity prices, equity prices, interest rate yield curves, credit curves, correlation,
creditworthiness of the counterparty, creditworthiness of the Company, option volatility and currency
rates.
Where appropriate, valuation adjustments are made to account for various factors such as liquidity risk
(bid-ask adjustments), credit quality, model uncertainty and concentration risk and funding.
Adjustments for liquidity risk adjust model-derived mid-market amounts of Level 2 and Level 3 financial
instruments for the bid-mid or mid-ask spread required to properly reflect the exit price of a risk position.
Bid-mid and mid-ask spreads are marked to levels observed in trade activity, broker quotes or other
external third-party data. Where these spreads are unobservable for the particular position in question,
spreads are derived from observable levels of similar positions.
17View entire presentation