Thursday, 21 March 2013

JP Morgan Asia Confidence Notes (Part 3)

I invested $50K into JP Morgan Asia Confidence Notes in June 2008.  I received the first quarterly payout of $937.50 in September 2008.

Almost immediately after I received my first quarterly payout, in mid September, Lehman Brothers collapsed.  After that event, the global financial market began a period of extreme volatility and all the stock indices fell sharply.

Suddenly, most of the structured products, which were previously promoted and sold as "high returns and low risks" have became hot potatoes and their risks greatly escalated. 

On Sep 18, 2008, The Straits Times reported that a structured product sold by DBS, High Notes 5 - with a promised annual return of about 5 per cent, was at great risk and warned that the investors may lose their entire principal in that Lehman-linked product.

Subsequently, other structured products have fallen one by one.  News received that another DBS structured products - High Notes 2 have fallen and investors may received just about 10% of their principal.

Then, more important to me, the structured products from JP Morgan are failing.  Pinnacle Notes Series 3 has fallen and Series 2 and 6 are also sinking.

Finally, I received a call from my "personal banker" that one of the indices in JP Morgan Asia Confidence Notes has dipped below the 50% barrier, and the "trigger event" may happen on the next observation date.  See attached graph below.

What options do I have?

1. I can hold the product until 2.5 years and hope that the worst index is above the 50% barrier then.  No loss to my principal in such event.

2. I can redeem the product immediately, but will suffer about 20% loss on my principal.

Although option 2 is undesirable, I still need to consider it because if the worst index ends below 50% initial level, I will  lose more than 50% of my invested principal.

At that time, I was on overseas assignment and the second option was not available to me, as I could not sign an agreement for early redrawal.

A small miracle happened for me and other JP Morgan Asia Confidence Notes investors, the worst index climbed back above the 50% barrier at the December observation date.  I received the second quarterly payout of $937.50 in December 2008.

I thought the worst was behind for JP Morgan Asia Confidence Notes, as the indices were rising slowly after Dec 2008.

However, the roller coaster ride was not over.  In February 2009, the indices fell again.  The worst index was teetering close to the 50% barrier as the March 2009 observation date approached.

Another miracle happened at the March observation date.  The worst index was just above the 50% barrier, an even more close shave and narrower escape than at the December observation date.

After March 2009, the worst was really over and all the indices rose slowly and steadily.  There was no more danger at the remaining observation dates.

During the 2.5 years tenure of JP Morgan Asia Confidence Notes, none of the indices ever reach their initial index values. 

I have collected the full 10 quarterly payouts, a total of $9,375 and the full principal of $50K on the product's maturity.

One last note, my "personal banker" did not survive through this crisis and was no longer at the bank when I withdrew my principal when JP Morgan Asia Confidence Notes matured in December 2010.

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