JP Morgan Chase 2015 Annual Report Download - page 197

JPMorgan Chase & Co./2015 Annual Report 187
Product/instrument Valuation methodology, inputs and assumptions
Classifications in the valuation
hierarchy
Investment and trading
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.
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 foreign exchange (“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
Additionally, adjustments are made to reflect counterparty credit quality
(credit valuation adjustments or “CVA”), the Firm’s own creditworthiness
(debit valuation adjustments or “DVA”), and funding valuation
adjustment (“FVA”) to incorporate the impact of funding. See page 200
of this Note.