JP Morgan Chase 2012 Annual Report Download - page 195

JPMorgan Chase & Co./2012 Annual Report 205
Level 3 inputs(a)
December 31, 2012 (in millions, except for ratios and basis points)
Product/Instrument Fair value Principal valuation technique Unobservable inputs Range of input values Weighted average
Residential mortgage-backed
securities and loans
$ 9,836 Discounted cash flows Yield 4 % - 20% 7%
Prepayment speed 0 % - 40% 6%
Conditional default rate 0 % - 100% 10%
Loss severity 0 % - 95% 15%
Commercial mortgage-backed
securities and loans(b)
1,724 Discounted cash flows Yield 2 % - 32% 6%
Conditional default rate 0 % - 8% 0%
Loss severity 0 % - 40% 35%
Corporate debt securities,
obligations of U.S. states and
municipalities, and other
(c)
19,563 Discounted cash flows Credit spread 130 bps - 250 bps 153 bps
Yield 0 % - 30% 9%
Market comparables Price 25 - 125 87
Net interest rate derivatives 3,322 Option pricing Interest rate correlation (75)% - 100%
Interest rate spread volatility 0 % - 60%
Net credit derivatives(b) 1,873 Discounted cash flows Credit correlation 27 % - 90%
Net foreign exchange derivatives (1,750) Option pricing Foreign exchange correlation (75)% - 45%
Net equity derivatives (1,806) Option pricing Equity volatility 5 % - 45%
Net commodity derivatives 254 Option pricing Commodity volatility 24 % - 47%
Collateralized loan obligations(d) 29,972 Discounted cash flows Credit spread 130 bps - 600 bps 163 bps
Prepayment speed 15 % - 20% 19%
Conditional default rate 2% 2%
Loss severity 40% 40%
Mortgage servicing rights
(“MSRs”) 7,614 Discounted cash flows
Refer to Note 17 on pages 291–295 of this Annual
Report.
Private equity direct
investments
5,231 Market comparables EBITDA multiple 2.7x - 14.6x 8.3x
Liquidity adjustment 0 % - 30% 10%
Private equity fund investments 1,950 Net asset value Net asset value(f)
Long-term debt, other borrowed
funds, and deposits(e)
12,078 Option pricing Interest rate correlation (75)% - 100%
Foreign exchange correlation (75)% - 45%
Equity correlation (40)% - 85%
Discounted cash flows Credit correlation 27 % - 84%
(a) The categories presented in the table have been aggregated based upon the product type, which may differ from their classification on the Consolidated
Balance Sheet.
(b) The unobservable inputs and associated input ranges for approximately $1.3 billion of credit derivative receivables and $1.2 billion of credit derivative
payables with underlying mortgage risk have been included in the inputs and ranges provided for commercial mortgage-backed securities and loans.
(c) Approximately 16% of instruments in this category include price as an unobservable input. This balance includes certain securities and illiquid trading
loans, which are generally valued using comparable prices and/or yields for similar instruments.
(d) CLOs are securities backed by corporate loans. At December 31, 2012, $27.9 billion of CLOs were held in the available–for–sale (“AFS”) securities
portfolio and $2.1 billion were included in asset-backed securities held in the trading portfolio. Substantially all of the securities are rated “AAA”, “AA”
and “A”. The reported range of credit spreads increased from the third quarter to the fourth quarter of 2012, while the reported ranges of other
unobservable parameters decreased. This was primarily due to the Firm incorporating a revised valuation model for CLOs, which uses a different
combination of valuation parameters as compared with the old model. The change did not have a significant impact on the fair value of the Firm’s CLO
positions.
(e) Long-term debt, other borrowed funds, and deposits include structured notes issued by the Firm that are financial instruments containing embedded
derivatives. The estimation of the fair value of structured notes is predominantly based on the derivative features embedded within the instruments.
The significant unobservable inputs are broadly consistent with those presented for derivative receivables.
(f) The range has not been disclosed due to the wide range of possible values given the diverse nature of the underlying investments.