JP Morgan Chase 2013 Annual Report Download - page 193

JPMorgan Chase & Co./2013 Annual Report 199
Product/instrument Valuation methodology, inputs and assumptions Classifications in the valuation hierarchy
Securities Quoted market prices are used where available. Level 1
In the absence of quoted market prices, securities are valued based on: Level 2 or 3
• Observable market prices for similar securities
• Relevant broker quotes
• Discounted cash flows
In addition, the following inputs to discounted cash flows are used for
the following products:
Mortgage- and asset-backed securities specific inputs:
• Collateral characteristics
• Deal-specific payment and loss allocations
• Current market assumptions related to yield, prepayment speed,
conditional default rates and loss severity
Collateralized loan obligations (“CLOs”), specific inputs:
• Collateral characteristics
• Deal-specific payment and loss allocations
• Expected prepayment speed, conditional default rates, loss severity
• Credit spreads
• Credit rating data
Physical commodities Valued using observable market prices or data Predominantly Level 1 and 2
Derivatives Exchange-traded derivatives that are actively traded and valued using
the exchange price, and over-the-counter contracts where quoted
prices are available in an active market.
Level 1
Derivatives that are valued using models such as the Black-Scholes
option pricing model, simulation models, or a combination of models,
that use observable or unobservable valuation inputs (e.g. plain vanilla
options and interest rate and credit default swaps). Inputs include:
Level 2 or 3
• Contractual terms including the period to maturity
• Readily observable parameters including interest rates and
volatility
• Credit quality of the counterparty and of the Firm
• Market funding levels
• Correlation levels
In addition, the following specific inputs are used for the following
derivatives that are valued based on models with significant
unobservable inputs:
Structured credit derivatives specific inputs include:
• CDS spreads and recovery rates
• Credit correlation between the underlying debt instruments (levels
are modeled on a transaction basis and calibrated to liquid
benchmark tranche indices)
• Actual transactions, where available, are used to regularly
recalibrate unobservable parameters
Certain long-dated equity option specific inputs include:
• Long-dated equity volatilities
Certain interest rate and FX exotic options specific inputs include:
• Interest rate correlation
• Interest rate spread volatility
• Foreign exchange correlation
• Correlation between interest rates and foreign exchange rates
• Parameters describing the evolution of underlying interest rates
Certain commodity derivatives specific inputs include:
• Commodity volatility
• Forward commodity price
Adjustments to reflect counterparty credit quality (credit valuation
adjustments or “CVA”), the Firms own creditworthiness (debit valuation
adjustments or “DVA”), and FVA to incorporate the impact of funding
see page 212 of this Note.