JP Morgan Chase 2003 Annual Report Download - page 60

M anagement’s discussion and analysis
J.P. M organ Chase & Co.
58 J.P. Morgan Chase & Co. / 2003 Annual Report
Count ry exposure
addition, the benefit of collateral, credit derivative hedges and
other short credit or equity trading positions are reflected. Total
exposure includes exposure to both government and private-
sector entities in a country.
The slight decrease in exposure to Brazil over the prior year-end
w as due to reductions in loans. The decline in M exican exposure
w hen compared w ith the prior year w as primarily due to loan
maturities and reductions in counterparty exposure on deriva-
tives. The reduction in South Korea w as due to a combination
of loan maturities and trading activities. Hong Kong’s exposure
declined due to low er counterparty exposure on derivatives. The
increase in Russian exposure w as due to cross-border and local
trading positions and short-term lending.
The Firm has a comprehensive process for measuring and manag-
ing its country exposures and risk. Exposures to a country include
all credit-related lending, trading and investment activities,
w hether cross-border or locally funded. In addition to monitoring
country exposures, the Firm uses stress tests to measure and man-
age the risk of extreme loss associated w ith sovereign crises.
The table below presents the Firm’s exposure to selected coun-
tries. The selection of countries is based on the materiality of
the Firm’s exposure and its view of actual or potentially adverse
credit conditions. Exposure amounts are adjusted for credit
enhancements (e.g., guarantees and letters of credit) provided
by third parties located outside the country if the enhancements
fully cover the country risk, as w ell as the commercial risk. In
Derivat ive contracts
In the normal course of business, the Firm utilizes derivative
instruments to meet the needs of customers, to generate rev-
enues through trading activities, to manage exposure to fluctu-
ations in interest rates, currencies and other markets and to
manage its ow n credit risk. The Firm uses the same credit risk
management procedures to assess and approve potential credit
exposures w hen entering into derivative transactions as those
used for traditional lending.
The follow ing table summarizes the aggregate notional amounts
and the reported derivative receivables (i.e., the M TM or fair
value of derivative contracts after taking into account the effects
of legally enforceable master netting agreements) at each of the
dates indicated:
Selected country exposure
At December 31, 2003 At December 31,
2002
Cross-border Total total
(in billions) Lending(a) Trading(b) Other(c) Total Local(d) exposure exposure
Brazil $0.2 $ 0.4 $ 0.6 $ 1.2 $ 0.8 $ 2.0 $2.1
Mexico 0.6 0.5 0.2 1.3 0.2 1.5 2.2
South Korea 0.6 0.4 0.3 1.3 0.9 2.2 2.7
Hong Kong 0.7 0.1 0.9 1.7 — 1.7 2.2
Russia 0.1 0.5 — 0.6 0.1 0.7 0.5
(a) Lending includes loans and accrued interest receivable, interest-bearing deposits with banks, acceptances, other monetary assets, issued letters of credit and undrawn commitments to extend credit.
(b) Trading includes (1) issuer exposure on cross-border debt and equity instruments, held in both trading and investment accounts, adjusted for the impact of issuer hedges, including credit derivatives;
and (2) counterparty exposure on derivative and foreign exchange contracts as well as security financing trades (resale agreements and securities borrowed).
(c) Other represents mainly local exposure funded cross-border.
(d) Local exposure is defined as exposure to a country denominated in local currency, booked and funded locally.
Notional amounts and derivative receivables MTM
Notional amounts(a) Derivative receivables MTM
As of December 31, (in billions) 2003 2002 2003 2002
Interest rate contracts $31,252 $ 23,591 $60 $55
Foreign exchange contracts 1,582 1,505 10 7
Equity 328 307 913
Credit derivatives 578 366 36
Commodity 24 36 22
Total notional and credit exposure 33,764 25,805 84 83
Collateral held against derivative receivables NA NA (36) (30)
Exposure net of collateral $33,764 $ 25,805 $48 $53
(a) The notional amounts represent the gross sum of long and short third-party notional derivative contracts, excluding written options and foreign exchange spot contracts.