JP Morgan Asia Confidence Notes (Part 2)

How exactly did JP Morgan Asia Confidence Notes work?  I have thrown away the product brochure.  But I remembered it was something like:

JP Morgan Asia Confidence Notes are tied to Singapore, Malaysia, Thailand and Taiwan stock indices and pay 7.5% p.a. coupon fixed on a quarterly basis, but is callable every quarter.

Scenario 1 : If the indices go above the initial index values

At the quarterly observation date, if all the 4 indices have gone above the initial index values, the bank has the right to "call" the product, i.e., the bank will redeem the product by returning the investors the principal with that quarter's coupon payment.   In more details, the notes would end if the closing levels of all four indices at the observation date - either concurrently or separately on different valuation dates including preceding ones - is higher than their respective initial levels.

For example, at observation date 1, if just Singapore and Malaysia indices are above their initial levels, the notes continue the quarterly payout.  At observation date 2, Thailand and Taiwan indices are above their initial levels, even though Singapore and Malaysia indices have fallen below the initial levels, it would trigger the "call" or "buy-back" event.

Outcome: Investors receive 100% principal, with quarterly payouts until early "call" of the product.

Naturally, investors will not wish for this scenario as they will not receive the full quarterly payouts for 2.5 years, a total of 10 quarterly payouts.

Scenario 2: If the indices stay between 50% and 100% of initial index values

If scenario 1 did not occur, at all quarterly observation dates during the 2.5 years, if all the 4 indices are below the initial index values, and above 50% initial index values, the bank will continue to the quarterly payouts.

Outcome: This is the best case scenario.  Investors receive 100% principal after 2.5 years, with a total of 10 quarterly payouts.

Scenario 3: If any of the indices fall below 50% at observation date

During the 2.5 years, if any one of the indices fell 50% from the initial index value at the quarter observation date, then the trigger event happens.  At this point in time, the product will stop quarterly coupon payment.  Investors do not know their loss, because they need to wait till the end of the 2.5 years to see where does the worst index ends.   

Scenario 3A: If the worst index ends above the initial index value

At the end of the 2.5 years (Final Valuation Date), if the worst index ends above the initial price, then no loss is incurred.  Investors receive 100% principal.

Outcome: Investors receive 100% principal, with quarterly payouts until trigger event.

Scenario 3B: If the worst index ends below the initial index value

If the worst index ends below the initial price, the loss will be the difference between the initial index value and the index value at the end of 2.5 years.  In other words, if worst index is 40% initial value, investors would get 40% principal.

Outcome: Investors receive (Final Index Value / Initial Index Value) x Principal, with quarterly payouts until trigger event.

This would be the worst case scenario, but no chance that the indices would fall to zero.

The next post will talk about how my JP Morgan Asia Confidence Notes actually performed during the 2.5 years. 

I never know that it is going to be a journey on the Knight Bus of Harry Potter tales, where you never quite know what will happen next.

(Part 3 to come...)