Professional Documents
Culture Documents
Ken S hoji
September 17th, 1996
Agenda .,
Forward contracts
Options
- Calls
- .Puts
- Combinations
Swaps
- Interest rate swaps
- Currency swaps
- Total returnswaps
Structured notes
Derivative markets
Derivatives
p-~--F~ Stock
Call option
A Call option gives the owner the
right, but not theobligation, to buy
stock at n specific price on or berorc .
the expiry date . .
------_-d
Premium $3
Option terms and conditions
Put buyer pays an upfront plrl11i~1111 5 15 I'ut cxpircs worthless stock'$IS- Option $3
'NO option payment Net = $12
Puts provide dbwnsidc price protection
$5 Put exercised Stock $5 - Option $3
JPMmllkespayment +Payment$5
of $5 Net = $7
Premium $3
Payoff profiles
Price
Price
Option spreads
Buy OTC Call spread at $10 strike, $17 cap, net $2
.........................
Call ,
Prcmium $3
; .. i
$12 .
-.
$17
$5 $10 $15 Price
Collar
Collar with $7-$15 range, no premium ('cashlk"):
A client buys a Put and sells n Cnll with
the same expiry date
- I f share price is lower than the Put >$15 Client makes payment Stock >$I5
strike, JPM pays the difference
between Put strike and markct
price
- If share price is higher than thc JPM makes payment Stock <$7
Cnll strike, client pays thc
difference between market price
and Call strike
I f premiums net out the transaction is
described as a "cashless" collar
Pay mcnt
Swaps: Interest rate swaps
. .
',
6m Libor
I
different currencies ~ash.ffowkenS
s s ?eW'ect iv&
I
I
US$ Libor 6% 8% 10% 6%
Cash flows are not netted against
eachother. There --exchange of principal US$ Floating A $100 -$3 -$4 -$S -6103-
-
M Fixed 89Ls.a.
. Swaps: Total return.swaps
' Swaps can involve exchanges-of virtually
any type of cash flow'sor asset returns 2 year S&P500 TRI swap on $100 against 6 month Libor:
S&P500 TRI
Li bor
Structured Notes
. .
. . .
It.
<
available buys 66% participati,on in the
appreciation of the basket ($7.53 151 1.4
The Derivatives Group launches an> . . = 66%). At maturity EDG pays any
MPD on the "European Corporate . appreciation to MGT Nassau. This is
Restructuring Basket". The 100% combined with the $100 guarantecd
principal protection version oifcrs 66Yo redemption amount.
parficipntion in the basket ups,idc.
,
Y
,
C ~ Ioption
I on
European Rcstrucluring Europcan stock
MPD bas kel
Exercise .'
American (Random American or European, with
assignmen t of exerc,ise) negotiated exercise
1 Commodity-
Swaps & . Foreign
Derivatives Fixed I Exchange Market
, , Derivatives
Income ~erivaives Derivatives
Dcrivativcs
..Currency
Interest rate .
.Brady bonds Energy
Precious meta
..
St~ks
Baskets
Equity indexes
..
Treasury
. Indexes
I .
,Interest rates
Currencies
Base metals
Agricultural
- . . I b
-This hooklct is intcndcd lo inrorn~you olprcducrs and scrviccs ,dr~ridhy T h i s n~alcri;tl-isno1 in~cnrfcdas nn ortcr or solicitation Tor thc purchasc
, ,
J -1'. Morgan. J.P. Mjrgan is thc mi~rkctingn:anc Ibr J.1'. Morgan & Cu. or s;llc or ;my li~~nncial Specific rcrcrcnccs arc for
instru~~~cnt.
'
Inuorporatcd and its subsidiwics worldwidc. Rclcrcnccs 1i1"J.P. Morgatt" illuslmlivc purpscs only. J.P. Morgan may hold a position or XI as
cnc'ornpass its w~rldwidcnclwork of subsidinrics, ir~uludingMorgan r~larkct111akcri a rhc linanciill instrumcn~sor markcts rclcvanl ro MPDs.
Guaran~yTrusl Cotnpany of New York. J.P. Morgan Sccuritics Inc. - , J.1'. Murgan nay cngagc i n l~cdgingor otllcr opcrations'in such mnrkcls
(JPMSI),and J.P. Morgan Invcstt~lcntM i m a g ~ ! c ~Inc.
l t J.1'. Morgan rclcvan! t o its MI'D cxposurcs.
Sccurilics Inc. JPMSI is a mcmhcr of thc Ncw York Slack ~~XC~I:III~L'. f!ic.,
thc Naiiuniil A<srxi;~tioai,fSccurilics Dcatcrs, Inu.. ;~ntltllc Seutirilics JI'MSf's ~,hligillionsr l l l t l thc sccuri~icssold, offcrcd, or rcconuncndcd
. . Invcstor Protcc~ion Carporation in thc Unitcd Sl;!tcs ;utd rlrc Socuri~ics;u~d h i JI'MSI ;ire rr,t dcpc;sils and ;Ire nol' ii\s"rccl by !hc Fcdcrul Dcposil
.. Futurcs Associalion in tllc Uni~cdKingdoal. l~~surnncc Corpc~ri~liu~l.
ihc 1:cdcrril Rcscrvc Donrd. or any olhcr
govcrnn~ct~lal ngcncy. JPMSI is 1101 ;Ibank and is a scparalc Icgal,cnlily
Opinions and csiimalcs oifcred constituk our judg~ncntand iirc suhjccr to from its hank and thrirt aTliliatcs. Thc ohligations OT JPMSl arc no1 ', ,
changc wirhout nolicc, us ari starcknts un linanciiil ~n;irkcttrends, which ' obligil~ionsof its bank or thrift arliliarcs (unlcss cxplicilly stalcd
arc baqcd on currcnt markcl condi~ions.Wc bclicvc rhc information olhcrwisc), and thcsc aCliliatcs arc no1 rcsponsiblc fo; xc'urilics sold.
. providcd hcrc is rcliablc, hul i f should not hc nssurncd to bc ciiliur ol'l'crcd,or rccoi~~~ncndcdby JPMSI.
. accurate or complclc. Past pcrrormancc i s not inclicntivt: of' futurc rcsulls.
Addi~ir,n;lliafo;rrla~ion is nvailnhlc on rcqucsl. Q J.P. Morgan & Co.
Thc vicws and straicgics dcscrihcd lnay not bc suirilhlc for a l l iuvcslors. It~corpr;r!cd1996. - ,
This prcscntatiqn i s not intcndcd lo provide, and should not hc rclicd ti11
for, accounting, Icgal. or tax advicc, or invcs~nrcntrcconilnc~~di~tions. Yr~u
should consult your tax-or lcgaf advisor'atwut l l ~ cissucs discussed hcrc. .
. .
Derivatives and Structured Products
Autumn Derivatives Seminar
Session 2: Essential Investment Strategies
Ken Shoji
September 24th 1996
Why use derivatives?
Leverage
Generating income '
- Swaps
- Selling Puts
- Selling Covered Calls
- Percs
Op~ian - . Stock
I
Leverage in swaps .
u Market
Monetizing positions using swaps
Client
Monetizing positions using swaps
~Client' I J P M I
Selling put options
Sell Put at $10 strike price, $3 premium:
Stock
$7
Premium $3
. .
I .
$15 Price
Selling call options
pp J-J]
..
Stock
- ------ @ *'
I
-
Premium $2
Another M l s s s d Opportunity
Sometimes I t just doesnWcpay to hedge. O n
Frlday afterrroan. an l n s t l t u t l o n a l investor,
evldentiy concern d that an investment In
MFS communtcafions was nor moving,
declded to plck up a H t t l e income by setllng call
optlons on the stock. T h e rtek was the investor '
would mtss out on any rlss In tho stock. ?hat
was exactly what happen& when M F S eald it
had agreed to be acqulred by Worldcorn.
Floyd Norrls :Market Place. [ P6.1
I
'
THE NEW YrlRlC TIMES, TUESDAY. , A UGUST 27, 1996
calls
di.vidend/income returns
Percs example
The strike level of the "out-of-the money" Call and the incremental
dividend are variables which can be adjusted
-
CaII value spread over life of Perc at
issuer's discount rate of 8% =
4.00% per annum
10.31% Call Value
College endowment fund has invested $40 million in a long term fixed
income portfolio for many years
bonds
Portfolio
.- High quaZity(AMAA) tominimize ~orh Flmr Plan Lihor + 13
credit risk A 7 T Crcdi~Cards 1,ibr + 12.5
First USA Credit Cnrd Lihor + 24
- Libor basedflows oflset swap liability Nationshqnk Ploalcr Lihr + 15
First Chicago Plonter Lihor + 13
Portfolio is held in JPM Asset Account
-
and pledged as collateral ngninst
exposure ,( ) , L i b o r + ! - 1 5 bps ,
. Financing transaction
- Use dealer's balance skeet and funding access '
Today
Lender
,- u
,-,
11 Borrow
Yen tOO million @ 270
Yen b
Yen 102 million
@ 3213.00
sell $850,000
$220,000 profit
@~oo.o~
sell $1.02 million
$50,000 profit
1 @95.32
Buy 7% bonds /OO.OO
(1 - $1.07 million
sell $1.07 million
break-even
0 Bonds e85.00 . -
sell $1.2 million
$130.000 loss
,
Forward contracts
*.
, Since Forward Exchange Rates are calculated using interest rate differentials
between the two currencies, the outcornes.should be the same as thk "physical"
transaction
The forward market is liquid and generally involves lower transaction costs
Possible oritcomes
al varying Yen/$ rates:
-el00.00
sell $ f .02million
$50.000 profit
BUY Spnr FX Rate: , .
$1.07 million 1
sell $1.07 million .
break-even
@85.00
se11.$1,2 million
$130,000 loss
Please kccp in mind ...
This hooklet is intended lo inform you of products i~ndscrviccs cdTurcrl hy This miiwri;~li s not intcndcd ;ts an nrrcr or solicitii~ionCur ~ h purchase
c
J.P. Morgan. I.P. Morgan i s the markcling namc Tor J.P.Morgan nt Ca. or s;dc nl'itny linancial instrument. S ~ c i f i crclcrcnccs arc lor
Incoqmrated and its subsidiaries worldwide. Rcfercnccs to "J.P. Morgiln" illustrative ptlrpscs only. J.P. Morg;in rnay hold n position or acl as
encompass its worldwide network or suhsidiarics. including Morgiln mnrkct tnakcr in the linnnviat in.~lrumcnls or m;akcls rclcvant to MPDs.
Guaranty Trust Company of New Yark, J.P. Morgan Sccuritics Inc. J.P. Morgnn may cng;lgc in hcdging ar olhcr optalions in such markcts
{JPMSI),and J.P. Morgan ~nvestmentManogcmcni Inc. J.P. Mnrgnn rclcvrint to i l s MPD cxpnsurcs.
Securities Inc. JPMSI i s a member of the New York Slouk Exchange, lnc.,
the Narionat ~ssocin'tionoisecuritics Dealers, Inc., ant1 the Sccuritics JPMSl's ohlig;~~ions and lhc sccuritics sold, oflircd, or rccom~nended'
Investor Protection Corporation in the Unilcd St:llcs n~lrltllc Sccuritics :mtl hy JPMSI iIrc not dcpnsifs ant! :ire not insurcd hy the Fcdcral D e p s i ~
Futures Association in the Unitcd Kingdom. Insurilncc Corporalinn, Ihc Fcdcml Rcscrvc b a r d , or any nlhcr
~ovcrnnicr~t:~l ;igcncy. JPMSI is not i t hink :~ndis :I scparalc legal cntity
Opinions and estima~esorrered constilule our judgnlcnt and arc suhject to liom its bi~nkilnd thrin atfilialcs. Thc ohlig;trions oC JPMSI arc not
change without not ice, as are statements on linanciihl tnarkcl trcnds. which ohliglions or its hank or lhrirt nffilia~cs(unlcss explicitly sralcd
art baed on current market conditions. We heticvc rhe informi~tion arc not respnsihle for securities sold,
nrhcrwisc), and lllcsc irrfilii~~cs
provided hcrc is reliahlc, hut i t should no1 he assumed In hc eichcr ol'rcrcd, or rccclmmcndcdhy JPMSI.
accuraie or complete. Past performance is no1 indicalivc of tt~lurcrcsalts.
Additinnal infonniilian is avnilahlc on rcqucxl. 0 J.P. Morgan & Ca.
The views and srraregies dcscrikd may no1 he suilaMc for all invcslors. Jncflrporillcd 1906.
This presentation i s not intended to provide, and should not he rcticd on
for. accoun~ing,legal, or lax advice, or investment rccornmcnda~ions.You
should consult your tax or legal advisor q h u t the issues discussed hcrc.
.Derivatives and Structured Products
Autumn Derivatives Seminar
Overall considerations
- Equity puts
- Cashless collars , .
Current posltlon
m .
' -Viewson current risk .. Current and future tax Time horizon
/return of assets position
Market considerations
- Daily average trading volume
- Size of holding relative to market capitalization of company
- Investor demand for large blocks of stock
- Depth of stock lending market
Regulatory considerations
- section 13(d).
- section 16
- Rule 144/ 145
- CFTC restrictions
Stock Sales
Liquidity is generated
,
Risk is reduced through diversification
- Most appropriate for those with long timk horizons
Single stock
Provides protection against a decline in the returns
value of a single stock Client
Client pays an upfront premium and, in return,
MGT.agrees to pay the difference between the -
strike price on the put and the market value of
stock at maturity
Morgan Guaranty
Trust Company
1
Cashless Collar
J.P. Morgan
Securities
I
,. Equity Linked Loan
'
Total return of underlying stock exchanged for
total return of market index such as S&P500
Index
Underlying equity risk neutralized:
- Any decline in value oEstock offset
by payment received under swap
- Any increase in value of stock Annual Stock
offset by payment due to Morgan spread depreciation
. under swap plus dividends -
,
Total return
of S&P 500
Fixed cost equal to annual spread on initial Stock Index
market value of underly ing 'shares . . . appreciation, I
. liquidated
Equity
Short vs. Linked Equity . Exchange
' Sales TheEhx - - S w a a Fund CRT
Defer capital gains Low Moderate Moderate Moderate High High
Investment flexibility High High High Moderate Low High
Provides liquidity High High High ' Low Low Moderate*
Long term solution High Moderate Moderate Moderate High High
Rollover risk Low High High . High Low Low
Certainty of cost High Low Moderate Moderate High High
Control of assets High High High High .Low Low,
* Income only
Case 1.:Structuri,ngthe appropriate vehicle
c11-l QFl
Jack Ellis Jr. Vanessa Ellis lare Matthew Karen Corsair
Stock price
Luke Corsair
22,717
Case 2,: Monetizing illiquid preferred stock . .
At inception: At maturity:
Market . . Market
Zero-coupon ' A
Investors
-
-Please keep in mind ...
This booklet is intended to inform you of products a i d sewices offered by This material is not intended as an offer or solicitation for the purchase
J.P. Morgan. J.P. Morgan isthe marketing name for J.P. Morgan & Co. or sale of any Xnancial instrument. Specific references are for -
Incorporated and its subsidiaries worldwide. References to "J.P. Morgan" illustrative purposes only. J.P. Morgan may hold a position or act as
encompass its worldwide network of subsidiaries, including Morgan market maker in >he Xnancial instruments or markets relevant to
Guaranty Trust Company of New York, J.P. Morgan Securities Inc. MFDs. J.P. Morgan may engage in hedging or other operations in such
(JPMSI), and J.P. Morgan Investment Management lnc. J.P. Morgan markets relevant to its MPD exposures.
Securities Inc. JPMSI is a member of the New York Stock Exchange, Inc.,
the'~ationa1Association of Securities Dealers, Inc., and the Securities JPMSI's obligations and the securities sold, offered, or recommended
Investor Protection Corporation in the United States and the Securities and by JPMSI are not deposits and are not insured by the Federal Deposit
Futures Association in the United Kingdom. Insurance Corporation, the Federal Reserve Board, or any other ,
dutions
Fa~tsr
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