JP Morgan Chase 2015 Annual Report Download - page 202

Notes to consolidated financial statements
192 JPMorgan Chase & Co./2015 Annual Report
curves, interest rates, prepayment speed, default rates,
volatilities, correlations, equity or debt prices, valuations of
comparable instruments, foreign exchange rates and credit
curves.
The following table presents the Firm’s primary level 3
financial instruments, the valuation techniques used to
measure the fair value of those financial instruments, the
significant unobservable inputs, the range of values for
those inputs and, for certain instruments, the weighted
averages of such inputs. While the determination to classify
an instrument within level 3 is based on the significance of
the unobservable inputs to the overall fair value
measurement, level 3 financial instruments typically include
observable components (that is, components that are
actively quoted and can be validated to external sources) in
addition to the unobservable components. The level 1 and/
or level 2 inputs are not included in the table. In addition,
the Firm manages the risk of the observable components of
level 3 financial instruments using securities and derivative
positions that are classified within levels 1 or 2 of the fair
value hierarchy.
The range of values presented in the table is representative
of the highest and lowest level input used to value the
significant groups of instruments within a product/
instrument classification. Where provided, the weighted
averages of the input values presented in the table are
calculated based on the fair value of the instruments that
the input is being used to value.
In the Firm’s view, the input range and the weighted
average value do not reflect the degree of input uncertainty
or an assessment of the reasonableness of the Firm’s
estimates and assumptions. Rather, they reflect the
characteristics of the various instruments held by the Firm
and the relative distribution of instruments within the range
of characteristics. For example, two option contracts may
have similar levels of market risk exposure and valuation
uncertainty, but may have significantly different implied
volatility levels because the option contracts have different
underlyings, tenors, or strike prices. The input range and
weighted average values will therefore vary from period-to-
period and parameter-to-parameter based on the
characteristics of the instruments held by the Firm at each
balance sheet date.
For the Firm’s derivatives and structured notes positions
classified within level 3 at December 31, 2015, interest
rate correlation inputs used in estimating fair value were
concentrated towards the upper end of the range
presented; equities correlation inputs were concentrated at
the lower end of the range; the credit correlation inputs
were distributed across the range presented; and the
foreign exchange correlation inputs were concentrated at
the top end of the range presented. In addition, the interest
rate volatility inputs and the foreign exchange correlation
inputs used in estimating fair value were each concentrated
at the upper end of the range presented. The equity
volatilities are concentrated in the lower half end of the
range. The forward commodity prices used in estimating the
fair value of commodity derivatives were concentrated
within the lower end of the range presented.