Bringing products to the market

1. Bringing products to the market From structured products to alternative investments

2. Agenda

3. JPMorgan’s approach—Product structuring Client-focused innovation Identify client objectives and constraints Incorporate client’s market view Assess risk appetite Tailor appropriate products Successful teamwork with Trading, Capital Markets & Research Incorporate JPMorgan’s view on the market Iterative approach

4. What do clients want? Asset-side clients seek yield enhancement Directional view relative to forwards Sell optionality to collect premium Liability clients typically want to Reduce funding costs via views on the forward and through selling optionality Manage asset and liability risks with balance sheet hedging and cashflow variance reduction Constraints faced by clients Regulatory e.g. FASB 133, local restrictions on use of derivatives etc. Some investors cannot take explicit FX exposure Apetite for exposure to volatility varies

5. Monetising Client’s View on Interest Rates Observing the implied 6-Month USD LIBOR curve represents the market’s expected future cost of meeting floating interest payments The present steep upward slope of the Implied LIBOR Forward Curve enables clients to extract a premium if they take the view that USD LIBOR rates will set lower than what the Curve implies

6. Products—Asset management Clients tailor their risk/return according to their views using options. They sell optionality to enhance their return using Range Index Bonds Callable Bonds Callable Capped Floaters Spread Options Callable Inverse Floaters

7. Products—Liability management Clients sell options in order to reduce cost of funding. Effectively they cap their upside using Caps/Floors KO Swaps Swaptions Inflation Swaps

8. Achieving client objectives Forward curve Can be a combination of FX spot and interest rate differential views Client view versus the forward Correlation Diversification benefit Multi-currency hedging strategies Volatility Premium pick-up versus downside protection

9. Agenda

10. Evolution of the Structured Products The chart below and next few slides show the evolution of Structured Products for the past five years The market have evolved from the zero coupon callable structures in 1997 to more sophisticated products such as global range accrual and inflation-linked notes

11. A brief history of developments in the Structured Credit Market Prior to 1997, synthetic credit was available as single name credit linked notes or first-to-default baskets. The first proper structured credit deals were characterised by a fully placed capital structure, both in arbitrage deals and in the balance-sheet transactions designed to help achieve regulatory capital relief for banks. With the development of the credit default swap market, and thus enhanced liquidity, tailor-made transactions started to be driven by investors. Risk management techniques were further developed to allow bespoke first-loss and mezzanine tranches. The next necessary step came with the ability to manage the underlying portfolio of tailor-made tranches, with rather loose management constraints. As the spreads tightened this year, investors have started searching for value in the equity market, thus the emergence of equity default swaps (EDS) and equity-linked collateralised obligations (ECOs) as an alternative to the CDS and CDOs. At the same time, regulated financial institutions have been looking for efficient ways to cover risky positions through structured credit, either for regulatory or economic capital relief. Another important innovation this year has been the launch of TRAC-X, where JPMorgan and other dealers provide a continuous 2-way liquid market. The doubling of the CDO market last year occurred because of fast risk management innovations, but also thanks to the attractive potential returns, the increased sophistication in the marketplace and investor’s understanding of the underlying instruments, CDS, and tranched portfolios. Prior to 1997, synthetic credit was available as single name credit linked notes or first-to-default baskets. The first proper structured credit deals were characterised by a fully placed capital structure, both in arbitrage deals and in the balance-sheet transactions designed to help achieve regulatory capital relief for banks. With the development of the credit default swap market, and thus enhanced liquidity, tailor-made transactions started to be driven by investors. Risk management techniques were further developed to allow bespoke first-loss and mezzanine tranches. The next necessary step came with the ability to manage the underlying portfolio of tailor-made tranches, with rather loose management constraints. As the spreads tightened this year, investors have started searching for value in the equity market, thus the emergence of equity default swaps (EDS) and equity-linked collateralised obligations (ECOs) as an alternative to the CDS and CDOs. At the same time, regulated financial institutions have been looking for efficient ways to cover risky positions through structured credit, either for regulatory or economic capital relief. Another important innovation this year has been the launch of TRAC-X, where JPMorgan and other dealers provide a continuous 2-way liquid market. The doubling of the CDO market last year occurred because of fast risk management innovations, but also thanks to the attractive potential returns, the increased sophistication in the marketplace and investor’s understanding of the underlying instruments, CDS, and tranched portfolios.

12. Rationale behind Structured Alternative Investments

13. Leveraged transactions magnify investors exposure to hedge funds