JP Morgan Chase 2009 Annual Report Download - page 177

JPMorgan Chase & Co./2009 Annual Report 175
Difference between aggregate fair value and aggregate remaining contractual principal balance outstanding
The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance out-
standing as of December 31, 2009 and 2008, for loans and long-term debt for which the fair value option has been elected. The loans were
classified in trading assets – loans or in loans.
2009 2008
December 31, (in millions)
Contractual
principal
outstanding Fair value
Fair value
over/(under)
contractual
principal
outstanding
Contractual
principal
outstanding Fair value
Fair value
over/(under)
contractual
principal
outstanding
Loans
Performing loans 90 days or more past due
Loans reported as trading assets $ — $ — $ — $ — $ — $
—
Loans — — — — —
—
Nonaccrual loans
Loans reported as trading assets 7,264 2,207 (5,057) 5,156 1,460
(3,696
)
Loans 1,126 151 (975) 189 51
(138
)
Subtotal 8,390 2,358 (6,032) 5,345 1,511
(3,834
)
All other performing loans
Loans reported as trading assets 35,095 29,341 (5,754) 36,336 30,342
(5,994
)
Loans 2,147 1,000 (1,147) 10,206 7,441
(2,765
)
Total loans $ 45,632 $ 32,699 $ (12,933) $ 51,887 $ 39,294 $
(12,593
)
Long-term debt
Principal protected debt $ 26,765(b) $ 26,378 $ (387) $ 27,043(b) $ 26,241 $
(802
)
Nonprincipal protected debt(a) NA 22,594 NA NA 31,973
NA
Total long-term debt NA 48,972 NA NA 58,214
NA
Long-term beneficial interests
Principal protected debt $ 90 $ 90 $ — $ — $ — $
—
Nonprincipal protected debt(a) NA 1,320 NA NA 1,735
NA
Total long-term beneficial interests NA $ 1,410 NA NA $ 1,735
NA
(a) Remaining contractual principal is not applicable to nonprincipal-protected notes. Unlike principal-protected notes, for which the Firm is obligated to return a stated
amount of principal at the maturity of the note, nonprincipal-protected notes do not obligate the Firm to return a stated amount of principal at maturity, but to return
an amount based on the performance of an underlying variable or derivative feature embedded in the note.
(b) Where the Firm issues principal-protected zero-coupon or discount notes, the balance reflected as the remaining contractual principal is the final principal payment at
maturity.
Note 5 – Derivative instruments
Derivative instruments enable end-users to modify or mitigate
exposure to credit or market risks. Counterparties to a derivative
contract seek to obtain risks and rewards similar to those that
could be obtained from purchasing or selling a related cash instru-
ment without having to exchange the full purchase or sales price
upfront. JPMorgan Chase makes markets in derivatives for custom-
ers and also uses derivatives to hedge or manage risks of market
exposures. The majority of the Firm’s derivatives are entered into
for market-making purposes.
Trading derivatives
The Firm transacts in a variety of derivatives in its trading portfolios
to meet the needs of customers (both dealers and clients) and to
generate revenue through this trading activity. The Firm makes
markets in derivatives for its customers (collectively, “client deriva-
tives”), seeking to mitigate or modify interest rate, credit, foreign
exchange, equity and commodity risks. The Firm actively manages
the risks from its exposure to these derivatives by entering into
other derivative transactions or by purchasing or selling other
financial instruments that partially or fully offset the exposure from
client derivatives. The Firm also seeks to earn a spread between the
client derivatives and offsetting positions, and from the remaining
open risk positions.
Risk management derivatives
The Firm manages its market exposures using various derivative
instruments.
Interest rate contracts are used to minimize fluctuations in earnings
that are caused by changes in interest rates. Fixed-rate assets and
liabilities appreciate or depreciate in market value as interest rates
change. Similarly, interest income and expense increase or decrease
as a result of variable-rate assets and liabilities resetting to current
market rates, and as a result of the repayment and subsequent
origination or issuance of fixed-rate assets and liabilities at current
market rates. Gains or losses on the derivative instruments that are
related to such assets and liabilities are expected to substantially
offset this variability in earnings. The Firm generally uses interest
rate swaps, forwards and futures to manage the impact of interest
rate fluctuations on earnings.
Foreign currency forward contracts are used to manage the foreign
exchange risk associated with certain foreign currency–
denominated (i.e., non-U.S.) assets and liabilities and forecasted
transactions, as well as the Firm’s net investments in certain non-
U.S. subsidiaries or branches whose functional currencies are not
the U.S. dollar. As a result of fluctuations in foreign currencies, the
U.S. dollar–equivalent values of the foreign currency–denominated
assets and liabilities or forecasted revenue or expense increase or
decrease. Gains or losses on the derivative instruments related to