fxc teach in

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FOR JPMC INTERNAL USE ONLY

This material is intended for JPMC Internal Use Only. The views and strategies described herein may not be suitable for all investors and more complete information is available which discusses risks, liquidity, and other matters of interest. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Past Performance is no guarantee of future results. It is not possible to invest directly in an index.

2014 U.S. Private Bank “Power On”: Currencies & Commodities

Anjanie Sriram

Analyst

Currencies & Commodities

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Agenda

Introduction: The FX&C team and the business

Intro to FX markets

Intro to Commodity markets

Option Basics

Case study: Oil markets

Intro to Structuring

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Presentation Notes

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Global coverage

• J.P. Morgan main FX Centers: New York, London, Hong Kong, Tokyo (IB), Singapore (IB) and Sydney (IB)

• Additional Sales Offices in Paris, Madrid, Milan, Toronto

• Local market offices in Mexico City, Sao Paulo, Seoul, Mumbai, Johannesburg and Buenos Aires, among others

London

Tokyo

Singapore

New York

Sydney

• More than 400 sales, trading, strategy and research professionals globally

• More than 4 million trade tickets booked every year

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• Anjanie Sriram

• Arif Khan

• Asher Joseph

• Catherine Lynch

• Drew Perry

• Elizabeth Montreuil

• Jean-Baptiste Bernard

• Matthew Tengi

• Scott Schnipper Group Email address: “PB FX”

Stephen Jury: Global Head of Foreign Exchange and Commodities

New York

• Erik Wytenus

• Katie Zhang

• Kurtis Wong Group Email address: “PB ASAP FX”

• Alex Keil

• Arman Salavitabar

• Frederick Panzini

• Meenal Patel

• Sara Yates (Strategist)

• Todd Matheny

• Alberto Boquin

• Andreea Talmaciu Group Email address: “PB FX EUROPE”

London Hong Kong

Private Banking FX and Commodities Team

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Presentation Notes

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Tactical Investments and Hedges

Structured Investments

Discretionary Offerings

Resources

Deliverable spot, forwards and swaps Non-deliverable forwards (NDFs) for EM currencies Vanilla and exotic options

Dual currency notes (DCNs) Capital protected notes, buffered notes, market plus notes,

autocallable notes, leveraged notes

Currency Funds: JPM International Currency Fixed Income Fund (ICFI) JPM Global Currency and Income Fund exG4

Customized hedging and portfolio strategies FX Weekly publication Client meetings / calls with FX Strategist and team Electronic trading Platform

Currency Solutions: Trading, analysis and advice

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Agenda


Intro to FX markets


Option Basics

Case study: Oil market

Intro to structuring

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27

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Presentation Notes

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• Size and Liquidity: An average 5.0 trillion dollars a day in turnover that makes the foreign exchange market the largest and most liquid in the world. For comparison, daily turnover in equities (cash and futures) averages $150bn for the S&P500, $ 20bn for NASDAQ, $40bn for DAX, $16bn for FTSE and$13bn for Nikkei.

• Trading hours: FX markets are open 24 hours a day.

• Regulatory environment: FX markets, especially versus other asset classes, are very lightly regulated. Admittedly this is changing however, especially in the derivatives business.

• In large part, this is due to the sheer size of FX markets; it is incredibly difficult for one player to influence the market, even short-term.

• Drivers: Macro-economic fundamentals; political concerns; technicals (historical price patterns); investor positioning; event and headline risk.

• Winners/losers: The expression “short sale” often used in equity does not exist in currency trading because the short sale of a currency is equivalent to a purchase of the other currency.

What makes FX markets unique?

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J.P. Morgan has one of the broadest, global client bases in the world • Central banks • Corporations • Hedge funds • Real money investors • Individual investors

J.P. Morgan’s strength across asset classes provides insight to FX trends not available to other financial firms

• Fixed income • Equities • Commodities • Credit • Emerging markets • Alternatives

This means we speak regularly with some of the most active players in the markets, helping them meet their specific investment goals. We leverage this insight for our own private Bank clients.

Market intelligence

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Presentation Notes

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•Central Banks: Managing FX trends, reserve portfolios [Monetary Policy] •Corporations: Generally looking to hedge FX risk •Mutual/Pension Funds: Looking to hedge FX risk in portfolios and take FX risk •Hedge Funds: Generally taking FX risk; shorter-term •Individual investors: Taking and hedging short and long term FX risk

•For instance, a corporation may be selling US dollars for an M&A transaction at the same time that a shorter-term hedge fun is looking to sell USD on macro-economic factors •These differences create trading opportunities, especially over shorter time horizons

Key players and Objectives

FX market players have different time horizons and goals

FX Market Players

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Balance of payments: Current-account surpluses

• Large current-account surpluses: currencies less prone to sell-offs.

• Large current-account deficits: rely more heavily on foreign capital flows to support currency

Yield: rising and/or high yields

• Attractive yields: easier time attracting capital flows

• Some caution is needed: A high yield could reflect domestic risk and the need by local policymakers to offer high yields to prevent capital flight – in such a case, a currency may not be as attractive as it might seem.

Long-term valuation: Undervalued or fairly valued

• Extremely undervalued currencies tend to have more asymmetric risks (clearly higher); overvalued FX can still appreciate, but usually such potential gains are more limited

Policymaker bias: Understanding policy bias towards currencies

• Local policymakers can change risk/return biases of currencies directly through a currency regime or indirectly

General Considerations in FX

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North America: • USD = US Dollar • CAD = Canadian Dollar

Central Europe and UK: • EUR = Euro • GBP = British Pound • CHF = Swiss Franc • DKK = Danish Krone • NOK = Norwegian Krone • SEK = Swedish Krona

Asia: • JPY = Japanese Yen • CNY = Chinese Yuan* • HKD = Hong Kong Dollar (TT) • SGD = Singapore Dollar • KRW = South Korean Won* •IDR = Indonesian Rupiah* • INR = Indian Rupee* • THB = Thai Baht

Eastern Europe: • RUB = Russian Rouble • TRY = Turkish Lira • CZK = Czech Koruna • PLN = Polish Zloty

Australia: • AUD = Australian Dollar • NZD = New Zealand Dollar

Middle East and Africa: • SAR = Saudi Arabian Riyal • ZAR = South African Rand • ILS = Israeli Shekel

South America: • MXN = Mexican Peso • ARS = Argentine Peso* • BRL = Brazilian Real* • VEB = Venezuelan Bolivar*

Currency Convention: Symbols of commonly traded currency

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1. Euro (EUR) 2. British Pound Sterling

(GBP) 3. Australian dollar (AUD) 4. New Zealand dollar (NZD) 5. US dollar (USD) 6. Canadian dollar (CAD) 7. Swiss franc (CHF) 8. Japanese yen (JPY)

Currency Hierarchy

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• 1 unit of currency = x units of USD

• EUR, GBP, AUD, and NZD are the only major currencies quoted as the base vs. the USD

• Other notables include the Fiji Dollar (FJD), Maltese Lira (MTL), and Botswana Pula (BWP)

BASE

EUR/USD = 1.3546/50 USD/JPY = 104.49/54

• 1 USD = x units of currency

• For all other currencies, USD is quoted the base currency

TERMS

EUR/USD does NOT mean EUR per 1 USD, it is in fact the opposite!!

• For a currency pair in which USD is the terms currency, a higher FX rate denotes currency strength; a lower FX rate denotes currency weakness

• To calculate USD amount from a given currency amount, you multiply by the FX rate

• For a currency in which USD is the base currency, a higher FX rate denotes currency weakness; a lower FX rate denotes currency strength

• To calculate USD amount from a given currency amount, you divide by the FX rate

When USD is the TERMS currency… When USD is the BASE currency…

Base and Terms Currency

BASE TERMS

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Agenda


Intro to FX markets


Option Basics



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Presentation Notes

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Tactical Investments and Hedges

• Spot, swaps and forwards • Unallocated and allocated physical bars (Precious Metals) • Vanilla and exotic options

Structured Investments

• Capital protected notes, buffered notes, market plus notes, autocallable notes, leveraged notes

Discretionary Offerings

• ETFs • Diversified Commodities Funds • Equity Funds focuses on commodity producers/companies

Precious Metals Industrial Metals Energy Agriculture

• Gold • Silver • Platinum • Palladium

• Aluminium • Copper • Lead • Nickel • Zinc • Tin

• Crude Oil •(WTI and Brent) • Natural Gas • Unleaded Gasoline

• Corn • Wheat • Soybeans • Cotton • Sugar • Cocoa

Commodity Solutions

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-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

2004 2006 2008 2010 2012 2014

Barclays U.S. Agg

MSCI World Index

S&P 500

Asset correlation to broad commodities as measured by the JPM Backwardation index

Commodities can help diversify a portfolio because individual commodity prices are typically affected by factors that are not highly correlated with each other, or with other markets.

•In the period from 1973 to February 2013, the correlation of the Bloomberg/UBS Commodity Index with global equities was just 0.12, while the index had a negative correlation with sovereign and corporate bond indices of only 0.12 and 0.06, respectively.

•This correlation benefit more or less evaporated in the aftermath of the financial crisis – the correlation rose to 0.96 in November 2010 and stayed above 0.50 until mid 2013.

•Over the past year, correlations have come back down to historical averages and we believe commodities once again offer an attractive investment profile for our clients.

Commodities reverting to historical correlations versus equities and bonds

Diversification, inflation orientation, and improving global growth support an allocation to commodities

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Since the beginning of July, commodities have experienced a pull back that is mainly attributable to declining energy and agriculture prices. We view this correction as an opportunity for clients to establish targeted exposure in commodities with supply constraints and positive carry.

120

122

124

126

128

130

132

134

136

138

140

Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14

Index level

DJUBS Index

Broad commodities have seen a sizable correction in July

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Crude Oil

Supply looking increasingly constrained and demand continues to gradually grow - expect prices to see modest upside from current levels.

• $105 – WTI 1 Yr forecast, revised up from $95 in Q2

• $115 – Brent 1 Yr forecast, revised up from $105 in Q2

Gold

Potential for higher US interest rates, moderate physical demand and benign inflation offset the positive sentiment change seen in the investor community (investors no longer bearish). We move our gold target modestly higher from current levels and will continue to watch inflation expectations.

•$1,325 – Gold 1 Yr forecast, revised up from $1,225 in Q2

Platinum Group Metals (Platinum and Palladium)

High and rising production costs weigh on long-term supply which will keep PGM market balances in deficit and provide a catalyst for higher prices.

• $ 900 – Palladium 1 Yr forecast, revised up from $825 in Q2

• $1,650 – Platinum 1 Yr forecast, revised up from $1,575 in Q2

Highlights from the Commodity Review

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Agenda


Intro to FX markets


Option Basics



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• Option: The holder of an FX Option has the right (but not the obligation) to buy (or alternatively to sell) a fixed amount of one currency for another currency at a fixed exchange rate on a pre-determined date in the future.

• Call/Put: The right to buy a fixed amount of a particular currency is known as a call option on that currency. The right to sell is known as a put option

Purchaser (holder) Seller (writer)

Call Has the right to buy Has the obligation to sell

Put Has the right to sell Has the obligation to buy

FX Options Terminology

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Exchange Rate

Profit & Loss

Put Strike price

Zero premium

Exchange Rate Strike

price

premium

Profit & Loss

Is the obligation (you receive a premium) to sell a particular currency at a specified price (strike) at a particular date (expiry) if the option is exercised.

Is the right but not the obligation (you pay a premium) to buy a particular currency at a specified price (strike) at a particular date (expiry).

Buying the Call option Selling the Call Option

Call Strike price

Call Option

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Exchange Rate

Profit & Loss

Strike price

premium

Exchange Rate

Strike price

premium

Profit & Loss

Is the obligation (you receive a premium) to buy a particular currency at a specified price (strike) at a particular date (expiry) if the option is exercised.

Is the right but not the obligation (you pay a premium) to sell a particular currency at a specified price (strike) at a particular date (expiry).

Buying the Put Option Selling the Put Option

Put Option

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30

40

50

60

70

0 3 6 9 12 15 18

$/barrel

Months to Maturity

CONTANGO means:

• Crude for immediate physical delivery is cheaper than crude for future delivery

• People are not willing to pay a premium to own oil right now. Historically contango has implied a oversupply of physical crude, high oil inventories, and a weak market/low price

• In theory, one could make money by buying crude for immediate delivery, putting it in storage, and selling more expensive futures, then delivering the stored crude against those futures when they come due at a later date

BACKWARDATION means:

• Crude for immediate physical delivery is more expensive than crude for future delivery

• Everyone is willing to pay a premium to own oil right now. Historically backwardation has implied a real or perceived shortage of physical crude, low oil inventories, and a strong market/high price

• One could make money by buying relatively cheap futures, and selling crude for immediate delivery at a higher price

85

90

95

100

0 3 6 9 12 15 18

$/barrel

Months to Maturity

Contango

Backwardation

Backwardation & Contango

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Volatility is a Measure of Movement •It is blind to direction – volatility is a measure of magnitude only •The number is expressed as a percentage (%) •Example: 20% volatility means that the asset moves in such a way that it goes up or down by 20% per year (1 standard-deviation move) •Volatility is always measured over some timeframe, and expressed in annualized terms. 1-month volatility is often substantially different than 1-year volatility

The Rule of 16 •You can divide a volatility number by 16 to estimate the expected daily move •Example: an implied volatility of 32% means that the stock is expected to move ~ (32%/16) = 2% every day

Important Terminology

•In option-speak, “vol” refers to volatility, not volume! In-the-money (ITM); Out-of-the-money (OTM); At-the-money (ATM)

•“Money” is relative to the option strike. A 105-strike call on a $100 stock is OTM

What is volatility?

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Strike: – exercise price, determined at the time

of purchase Expiry Date:

– the last date on which the holder of the option may choose to exercise

Premium: – value of the options paid by the buyer

European style: – option which may be exercised only on

expiry date American style:

– option which may be exercised at any time prior to expiry

Holder: – owner of an option

Writer: – seller of an option

Vanilla option: – Puts and calls and any combination of puts

and calls, with known pay out at expiry Exotic option:

– All other options that are non-vanilla, where price is path dependent

In-the-money-forward option: – Strike is more favorable to the holder than

the current forward outright Out-of-the-money-forward option:

– Strike is less favorable to the holder than the current forward outright

At-the-money-forward option: – Strike is equal to the current forward

outright.

Definitions

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Agenda


Intro to FX markets


Option Basics



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Presentation Notes

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•What is it - crude oil, or petroleum, is a naturally occurring liquid made up of hydrocarbons found in the upper layer’s of the Earth’s crust. Through a refining process, crude is broken down to create useful energy products.

• Major Uses - the vast majority of oil is used for the refining of fuel products – gasoline, kerosene, diesel, etc; additionally used for heating oil, gasses such as propane, and also used for such things as solvents, asphalt, & synthetic rubber

• Major producers – Russia (12%), Saudi Arabia (11%), US (9%), Iran (5%), China (5%), Canada (4%)

• Major consumers – US (22%), China (11%), Japan (5%)

• Which crude oils PB can trade:

• Brent – leading benchmark for European oil market; light, sweet crude (high quality); named after the Brent oil field in the North Sea

• More info: https://www.theice.com/productguide/ProductDetails.shtml?specId=219

• West Texas Intermediate (WTI) – leading benchmark for the North American oil market ; light, sweet crude (high quality);

•More info: http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_contract_specifications.html

Crude Oil

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The improving demand for oil is becoming increasingly difficult to meet given the challenges faced on the supply side.

Oil demand growth in the last 3 months of the year is running ahead of IEA expectations, and the recent rebound in PMIs in the US, Europe and China suggest that this is likely to continue. The latest Chinese import data shows that Chinese demand in June was the strongest on record.

Combined, the US (19mbd), Europe (14mbd) and China (10mbd) account for roughly 50% of global demand.

Over the long-term, demand is expected to continue to outpace supply as the global economy picks up steam, despite expectations that we could see the US add another 750kbd-1mbd to overall supply by next year.

87.50 88.10

89.70 89.70

90.50

91.40

85

86

87

88

89

90

91

92

2012 2013 2014

mbd Supply Demand

Source: J.P. Morgan Commodities Research , Oil Market Monthly, 12 Aug 2013

-100

-50

0

50

100

150

200

250

300

350

Korea Mexico India Brazil Japan China US

Oil demand growth vs. IEA estimates y/y (May-July '13)

kbd

Source: Goldman Sachs, Oil Gauge Monthly 19 Aug 2013

Demand growth ahead of IEA expectations

Chinese crude oil imports continue to grow

1

2

3

4

5

6

7

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

China Customs Crude Oil Imports mbd

Source: Bloomberg, 30 Aug 2013

Global demand expected to outpace supply

Supply/demand balance projected to remain tight

Oil demand expected to grow as the global economy continues to recover

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Global oil supply & demand balance mb/d

2014E* 2015E*

Total Demand 91.6 93.1

OECD 45.9 46.0

Non-OECD and other 45.7 47.1

Total Oil Supply 91.7 92.9

OPEC Crude & liq. 35.9 36.1

Non-OPEC Crude 55.8 56.8

Net Balance +0.1 -0.1

Supply: Disruptions from key producing regions (Middle East) in the context of an already tightly supplied market with little spare capacity have caused oil prices to remain elevated.

Demand: We expect global growth to continue its trend higher in the coming quarters particularly in emerging markets, which should be supportive of demand for crude. However, we only see moderate upside for spot prices from current levels as North American crude production continues to reach new highs.

OPEC spare crude oil production capacity (mb/d) Estimated OPEC crude oil production outage

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2011 2012 2013 2014

Iraq Nigeria Libya Iran

0

1

2

3

4

5

6

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Note: Shaded area represents 2003-2013 average (2.2 million barrels per day).

Source: Short-Term Energy Outlook, July 2014.

Crude Oil cont.

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WTI Levered CBEN

Tenor: 16.5 months

Coupon: 7%

Cap: 7.25%

Leverage: 2x

Max Gain: 14.50%

Principal Barrier: 85% at expiry

Reoffer: 98.80%

Expiry Date: Dec. 15, 2015

WTI Price Action

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115 CL1 Comdty Barrier at expiry 85%

Underlying Price Underlying Return Structure Return

$110.00 10.00% 21.00%

$104.00 4.00% 12.00%

$102.00 2.00% 6.40%

$100.00* 0.00% 6.40%

$85.00 (15.00)% 6.40%

$70.00 (30.00)% (30.00)%

* Assuming Initial Price

Payout: Client receives the greater of the coupon or the leveraged return to the cap, contingent that the barrier is not broken at expiry

Crude Oil Offering

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Agenda


Intro to FX markets


Option Basics



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Presenter

Presentation Notes

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What? Fixed tenor securities that establish payoff profiles and benefit from anticipated market outcomes; many structures have partial downside protection.

How? A Structure is created by combining a zero-coupon bond with options, such as puts and calls, on an underlying equity index, stock, commodity, foreign currency or interest rate.

Why? To implement a view by generating positive returns in uncertain markets, leveraging upside and establishing partial downside protection.

What is a structured product?

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Challenging conditions •ability to obtain downside protection by trading away unexpected upside

Sideways markets

•ability to profit from a directionless market via fixed returns and enhanced yield

Directional markets

•ability to capture and amplify market returns

Structures are an important tool in any market environment

Looking to put available cash to work but are hesitant to be in the market • ability to “dip their toes in the market”

Concerned about managing risk

•ability to take selective risk on high conviction ideas with the benefit of a “cushion” against potential loss

Interested in building out their investment exposure

•structures can be an effective complement to existing investment positions

Structures may be particularly beneficial for clients

The role of structures in a portfolio

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Levered CBEN Buy zero coupon bond 96.0 Buy a many bullish call spreads on WTI 1.5 Buy an ITM digital option 2.5 on WTI Sell an ATMS put that knocks (2.0) In at 85% of initial strike Issuer hedging and legal cost 0.8 JPM placement fee 1.2 Client buys structure at par 100 Extra credit: Why are the call options cheap? The calls are cheap because you are purchasing call options which, due to “backwardation”, are very out of the money.

How the FXC team creates a Levered CBEN

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Trading • FX: Spot, forwards, options, structured notes • Commodities: Physical precious metals, forwards, options, structured notes • Trading advice on FX & Commodity-related assets (ETFs, etc)

Analysis • Customized hedging and portfolio strategy for clients • Raw data • One-on-one client and investor/banker conversations (phone, in person) • Guidance on global markets broadly

When to contact the FX & Commodities desk • Execution of trades • Pricing requests for investor teams • Views and outlooks on currency and commodity markets • More Information on our products and structures

What can we do for you?

35

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