FXC Teach In
Transcript of 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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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.
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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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.
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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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.
• 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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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.
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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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.
Agenda
Introduction: The FX&C team and the business
Intro to FX markets
Intro to Commodity markets
Option Basics
Case study: Oil market
Intro to structuring
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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.
• 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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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.
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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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.
•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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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.
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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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.
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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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.
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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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.
• 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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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.
Agenda
Introduction: The FX&C team and the business
Intro to FX markets
Intro to Commodity markets
Option Basics
Case study: Oil market
Intro to structuring
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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.
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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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.
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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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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.
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.
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Index level
DJUBS Index
Broad commodities have seen a sizable correction in July
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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.
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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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.
Agenda
Introduction: The FX&C team and the business
Intro to FX markets
Intro to Commodity markets
Option Basics
Case study: Oil market
Intro to structuring
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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.
• 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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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.
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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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.
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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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.
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$/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
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Months to Maturity
Contango
Backwardation
Backwardation & Contango
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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.
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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INA
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HE P
UB
LIC
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.
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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INA
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HE P
UB
LIC
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.
Agenda
Introduction: The FX&C team and the business
Intro to FX markets
Intro to Commodity markets
Option Basics
Case study: Oil market
Intro to structuring
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INA
TIO
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HE P
UB
LIC
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.
•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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INA
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N T
O T
HE P
UB
LIC
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.
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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UB
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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.
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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INA
TIO
N T
O T
HE P
UB
LIC
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.
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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85
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100
105
110
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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UB
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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.
Agenda
Introduction: The FX&C team and the business
Intro to FX markets
Intro to Commodity markets
Option Basics
Case study: Oil market
Intro to structuring
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15
20
27
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INA
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N T
O T
HE P
UB
LIC
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.
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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N O
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INA
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N T
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HE P
UB
LIC
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.
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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N O
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INA
TIO
N T
O T
HE P
UB
LIC
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.
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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N O
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INA
TIO
N T
O T
HE P
UB
LIC
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.
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?
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