S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L J P M O R G A N S T R U C T U R E D I N V E S T M E N T S Giving investors greater control over the risk and return in portfolios May 2012 Brandon Igyarto, Vice President Best Derivatives House of the Year Best Equity Derivatives House of the Year Risk, January 2012 JPMorgan Securities, LLC FOR RIA/BROKER-DEALER USE ONLY Please note strategies discussed in this presentation may not be available at all firms. All inquiries regarding availability should be directed to your respective home office.
J P M O R G A N S T R U C T U R E D I N V E S T M E N T S Disclaimer This presentation is for discussion purposes only and is not intended to be an offer to sell or the solicitation of an offer to buy any securities issued by JPMorgan. In the event JPMorgan were to offer structured investments, this presentation will be superseded and replaced in its entirety by a preliminary or final term sheet or pricing supplement, and the documents therein which would be filed with the SEC. In the event of any inconsistency between the information presented herein and any such preliminary or final term sheet or pricing supplement, such preliminary or final term sheet or pricing supplement shall govern. Copyright 2012 JPMorgan Chase & Co. All rights reserved. The presentation was developed, compiled, prepared and arranged by JPMorgan through the expenditure of substantial time, effort and money and constitutes valuable intellectual property and trade secrets of JPMorgan. All right, title, and interest in and to the presentation is vested in JPMorgan and the presentation cannot be used without JPMorgan s prior written consent. Information herein is believed to be reliable but JPMorgan does not warrant its completeness or accuracy. The information contained in this presentation has been distributed to you on a stand alone basis and is not to be combined with, consolidated, incorporated or otherwise used with any other written materials provided by JPMorgan. IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with JPMorgan Chase & Co. of any of the matters address herein or for the purpose of avoiding U.S. tax-related penalties. Investment suitability must be determined individually for each investor, and the financial instruments described herein may not be suitable for all investors. The products described herein should generally be held to maturity as early unwinds could result in lower than anticipated returns. This information is not intended to provide and should not be relied upon as providing accounting, legal, regulatory or tax advice. Investors should consult with their own advisors as to these matters. This material is not a product of JPMorgan Research Departments. Structured Investments may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. JPMorgan and its affiliates may have positions (long or short), effect transactions or make markets in securities or financial instruments mentioned herein (or options with respect thereto), or provide advice or loans to, or participate in the underwriting or restructuring of the obligations of, issuers mentioned herein. JPMorgan is the marketing name for JPMorgan Chase & Co. and its subsidiaries and affiliates worldwide. J.P. Morgan Securities Inc. is a member of FINRA, NYSE and SIPC. Clients should contact their salespersons at, and execute transactions through, a JPMorgan entity qualified in their home jurisdiction unless governing law permits otherwise. 1
J P M O R G A N S T R U C T U R E D I N V E S T M E N T S Agenda J.P. Morgan Structured Investments Overview 2 Case Study: ETF Efficiente Certificate of Deposit 7 Case Study: Buffered Return Enhanced Notes 16 Case Study: Tail-risk Hedge through Volatility 22 2
J. P. M O R G A N S T R U C T U R E D I N V E S T M E N T S O V E R V I E W What are Structured Investments? Structured Investments (SIs) are notes that create specific payout profiles payable at maturity that are tied to various market outcomes. Structures can be based on the performance of a variety of underlyings across asset classes SIs can be used to complement traditional portfolio models, to reduce risk, to explicitly express your particular market view, or to diversify the exposure in your clients portfolios via access to hard to reach underlyings. SIs are built by combining a zero-coupon bond with options written on the chosen underlying. Why should you use Structured Investments? Structures can present attractive investment opportunities because they allow investors to customize the risk and return profiles in their portfolios. J.P. Morgan can tailor Structures to fit your expectations for a particular market view, potentially maximizing the outcome for investors. Because notes typically have maturities ranging from one to six years, Structures are ideal for buy-and-hold investors committed to welldefined portfolio strategies. 3
J. P. M O R G A N S T R U C T U R E D I N V E S T M E N T S O V E R V I E W Method of Delivery Efficient platform via the various Broker-Dealers Issued in $1,000 denominations Can be structured for fee-based accounts or for traditional brokerage accounts Consistent monthly calendar of offerings offered on a best-efforts basis requiring no minimum purchase amount Ability to customize offerings to fit your particular need or view across asset classes Equities Commodities Fixed Income (bonds/interest rates) Currencies Alternatives JPMorgan is committed to providing liquidity in the secondary market* JPMorgan maintains an active secondary market during market hours Bids updated live on Bloomberg (type JPJP <GO>) and every 15 minutes at www.jpmorgan.com/si Participation rates and principal protection apply only at maturity *There is no guarantee that a secondary market will exist for all products. These investments are intended to be held to maturity and selling prior to this could subject the investment to loss. 4
J. P. M O R G A N S T R U C T U R E D I N V E S T M E N T S O V E R V I E W Turn-Key Marketing Program and Education Campaign To help educate you and your team about Structured Investments, JPMorgan has created a toolkit. The toolkit contains the following: Partner Education Interactive Module: website oriented towards training partners about the fundamentals of Structured Investments www.jpmorgan.com/si: website available to advisors and their clients Customized web-based conference calls and/or in-person branch presentations Customized content on your company s intranet: not for client distribution Solutions Portfolio: designed to deliver comprehensive overview of Structured Investments and their portfolio fit Solution Series: brochures designed to educate advisors about the use of Structured Investments in balanced portfolios E-alerts: targeted e-mails aimed at launching specific Structured Investments products to partners Co-branded advertising: advertisements to appear in magazines read by investors Not all materials are approved for use at all firms. Please check with your respective home office regarding availability. 5
J. P. M O R G A N S T R U C T U R E D I N V E S T M E N T S O V E R V I E W Disclaimer This presentation is for discussion purposes only and is not intended to be an offer to sell or the solicitation of an offer to buy any securities issued by JPMorgan. In the event JPMorgan were to offer structured investments, this presentation will be superseded and replaced in its entirety by a preliminary or final term sheet or pricing supplement, and the documents therein which would be filed with the SEC. In the event of any inconsistency between the information presented herein and any such preliminary or final term sheet or pricing supplement, such preliminary or final term sheet or pricing supplement shall govern. IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with JPMorgan Chase & Co. of any of the matters address herein or for the purpose of avoiding U.S. tax-related penalties. Investment suitability must be determined individually for each investor, and the financial instruments described herein may not be suitable for all investors. The products described herein should generally be held to maturity as early unwinds could result in lower than anticipated returns. This information is not intended to provide and should not be relied upon as providing accounting, legal, regulatory or tax advice. Investors should consult with their own advisors as to these matters. This material is not a product of JPMorgan Research Departments. Structured Investments may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. JPMorgan and its affiliates may have positions (long or short), effect transactions or make markets in securities or financial instruments mentioned herein (or options with respect thereto), or provide advice or loans to, or participate in the underwriting or restructuring of the obligations of, issuers mentioned herein. JPMorgan is the marketing name for JPMorgan Chase & Co. and its subsidiaries and affiliates worldwide. J.P. Morgan Securities Inc. is a member of FINRA, NYSE and SIPC. Clients should contact their salespersons at, and execute transactions through, a JPMorgan entity qualified in their home jurisdiction unless governing law permits otherwise. 6
J P M O R G A N S T R U C T U R E D I N V E S T M E N T S Agenda J.P. Morgan Structured Investments Overview 2 Case Study: ETF Efficiente Certificate of Deposit 7 Case Study: Buffered Return Enhanced Notes 16 Case Study: Tail-risk Hedge through Volatility 22 7
C A S E S T U D Y : E T F E F F I C I E N T E C E R T I F I C A T E O F D E P O S I T Case Study: Challenges for Fixed Income Investing Sustained rally in fixed income has left interest rates at or near their all-time lows Presents challenges for fixed income portfolios going forward Duration risk should rates rise Lack of further upside potential Minimal coupon income from traditional CDs and bonds Market linked CDs and notes can provide an alternative to traditional fixed income as future returns can be driven by crossasset exposure The JPMorgan ETF Efficiente 5 Index is a cross-asset strategy based on exchange traded funds ( ETFs ) which aims to maximize return for a given level of risk 8
C A S E S T U D Y : E T F E F F I C I E N T E C E R T I F I C A T E O F D E P O S I T Construction: A Zero and a Call CDs and PPNs Allow clients to participate in some, but not always all, of the underlying s return Cross-asset class platform allows PPNs to be linked to equities as well as to commodities, currencies, interest rates, or hybrid baskets thereof Participation rates vary depending on current market conditions Example: $1,000 initial investment with 100% principal protection and 5 year maturity $100 to structure option $900 to structure bond? $1,000 Principal Protected Potential for coupon or higher upside linked to the performance of the underlying Upside can be linked to: Equities Commodities Currencies Interest rates Hybrid baskets Initial investment Investment at maturity The depiction is for illustrative purposes only. 9
C A S E S T U D Y : E T F E F F I C I E N T E C E R T I F I C A T E O F D E P O S I T 5-year CD linked to the JPMorgan ETF Efficiente 5 Index Linked to the performance of the JPMorgan ETF Efficiente 5 Index, 100% principal return, 105% participation Features 100% full repayment of principal at maturity The CD offers 105% uncapped participation in the return of the JPMorgan ETF Efficiente 5 Index The Index offers exposure to five different sectors: Developed Equity, Emerging Markets, Alternative Investments, Bonds and Inflation/Cash The Index rebalances monthly a synthetic portfolio composed of the 13 Basket Constituents (see table below and to the right) and is based on the modern portfolio theory approach to asset allocation, which suggests how a rational investor should allocate his capital in order to maximize returns for a given risk appetite, targeting a volatility of 5.00% ETF Efficiente 5 tracks the excess returns of the Index above cash Considerations The investment strategy used to construct the Index involves monthly rebalancing and weighting caps that are applied to the Basket Constituents Correlation of performances among the Index Constituents may reduce the performance of the CD FDIC insured up to applicable limits No interest payments, dividend payments or voting rights The CD will not exactly track the underlying Index prior to maturity Terms Issuer: Tenor: Underlying Index: Index Constituents Sector Cap ETF Constituent Ticker Developed Equity 50% Bonds 50% Asset Cap SPDR S&P 500 ETF Trust SPY 20% ishares Russell 2000 Index Fund IWM 10% ishares MSCI EAFE Index Fund EFA 20% ishares Barclays 20+ Year Treasury Bond Fund ishares IBOXX Investment Grade Corp. Bond Fund ishares IBOXX High Yield Corp. Bond Fund Emerging ishares MSCI Emerging Markets Index Markets Fund 25% ishares JPMorgan USD Emerging Markets Alternatives 25% Bond Fund TLT 20% LQD 20% HYG 20% EEM 20% EMB 20% ishares Dow Jones Real Estate Index Fund IYR 20% ishares S&P GSCI Commodity-Indexed Trust JPMorgan Chase Bank, N.A. 5 years Principal Return at Maturity: 100% Participation: 105%* The JPMorgan ETF Efficiente 5 Index * The Participation will be determined on the Pricing Date and will not be less than 105%. GSG 10% SPDR Gold Trust GLD 10% Inflation/Cash ishares Barclays TIPS Bond Fund TIP 50% 50% JPMorgan Cash Index USD 3 Month 50% 10
C A S E S T U D Y : E T F E F F I C I E N T E C E R T I F I C A T E O F D E P O S I T Return The JPMorgan ETF Efficiente 5 allocation methodology Rotation methodology Every month, the strategy constructs an Efficient Frontier based on the returns, volatilities and correlations of the underlying ETF assets and cash over the previous six months Step 1 On each monthly rebalancing date, ETF Efficiente tests all possible combinations of portfolio weights for an observation period over the previous six months Step 2 For each portfolio, the performance and volatility are computed, and then sorted according to its returns Step 3 ETF Efficiente then selects weightings according to the unique portfolio exhibiting the highest return with an annualized volatility of 5.00% or less ETF Efficiente then allocates according to these weights until the next rebalancing date, and tracks the excess returns of the portfolio above cash The weighting of the assets comprising ETF Efficiente are allowed to vary in steps of 5% and are subject to individual and sector caps to prevent concentration in assets or sectors A historical simulation of the ETF Efficiente strategy shows annualized returns of around 6.71% with average annual volatility of around 5.90% Optimum portfolios and the efficient frontier 16% 12% 8% 4% 5% Target Volatility Efficient Portfolio 0% 4% 8% 12% 16% Source: J.P. Morgan Annualized risk ETF Efficiente 5: Hypothetical and Actual Historical Performance (April 30, 2002 April 30, 2012) 250 200 150 100 ETF Efficiente 5 S&P 500 Index Barclays Agg. Index (ER) Source: J.P. Morgan. Past performance is no guarantee of future performance. Performance figures relate to the period April 30, 2002 to April 30, 2012. Barclays Aggregate Index Excess Return represents a hypothetical index constructed from the returns of the Barclays Aggregate Index with the returns of the Cash Index deducted. 50 0 Apr 02 Apr 04 Apr 06 Apr 08 Apr 10 Apr 12 11 Past performance is no guarantee of future performance.
C A S E S T U D Y : E T F E F F I C I E N T E C E R T I F I C A T E O F D E P O S I T Example Allocation: Balanced Model Mutual Fund Model Allocations Integrated Model Allocations FINC ST, 15% cash, 4% LC Grow th, 3% LC Core, 10% LC Val, 3% Structured CDs, 5% FINC ST, 15% cash, 4% LC Grow th, 3% LC Blend, 9% LC Val, 3% Mid/Sm, 8% Mid/Sm, 7% FINC Int/LT, 20% Int'l, 25% FINC Int/LT, 19% Int'l, 24% Alternatives, 12% Alternatives, 11% Asset Class Allocation Large Cap Domestic Growth 3% Large Cap Domestic Core 10% Large Cap Domestic Value 3% Mid/Small Cap Domestic Blend 8% International 25% Alternatives 12% Fixed Income (intermediate/long term) 20% Fixed Income (short-term) 15% Cash 4% Asset Class Allocation Large Cap Domestic Growth 3% Large Cap Domestic Core 9% Large Cap Domestic Value 3% Mid/Small Cap Domestic Blend 7% International 24% Alternatives 11% Fixed Income (intermediate/long term) 19% Fixed Income (short-term) 15% Efficiente Certificate of Deposit 5% Cash 4% 12
C A S E S T U D Y : E T F E F F I C I E N T E C E R T I F I C A T E O F D E P O S I T 4-year Annual Income Note linked to the JPMorgan ETF Efficiente 5 Index Linked to the performance of the JPMorgan ETF Efficiente 5 Index, 100% principal return, uncapped participation, [0.00%-0.25%] p.a. min coupon Features Terms 100% full repayment of principal at maturity, subject to the credit risk of JPMorgan Chase & Co. The note offers 100% uncapped participation in the return of the JPMorgan ETF Efficiente 5 Index through annual coupons Annual coupon equal to the greater of: (i) Annualized performance of the Index (performance since pricing date divided by number of years since pricing date), and (ii) [0.00%- 0.25%] p.a. min coupon The Index offers exposure to five different sectors: Developed Equity, Emerging Markets, Alternative Investments, Bonds and Inflation/Cash The Index rebalances monthly a synthetic portfolio composed of the 13 Basket Constituents (see table below and to the right) and is based on the modern portfolio theory approach to asset allocation, targeting a volatility of 5.00% ETF Efficiente 5 tracks the excess returns of the Index above cash Considerations The investment strategy used to construct the Index involves monthly rebalancing and weighting caps that are applied to the Basket Constituents Correlation of performances among the Index Constituents may reduce the performance of the note No dividend payments or voting rights The note s payout does not reflect a direct investment in the Index or any of its constituents Issuer: Tenor: * The Minimum Coupon will be determined on the Pricing Date and will not be less than 0.00% p.a. or greater than 0.25% p.a. Index Constituents Sector Cap ETF Constituent Ticker Developed Equity 50% Bonds 50% Asset Cap SPDR S&P 500 ETF Trust SPY 20% ishares Russell 2000 Index Fund IWM 10% ishares MSCI EAFE Index Fund EFA 20% ishares Barclays 20+ Year Treasury Bond Fund ishares IBOXX Investment Grade Corp. Bond Fund ishares IBOXX High Yield Corp. Bond Fund Emerging ishares MSCI Emerging Markets Index Markets Fund 25% ishares JPMorgan USD Emerging Markets Alternatives 25% Bond Fund TLT 20% LQD 20% HYG 20% EEM 20% EMB 20% ishares Dow Jones Real Estate Index Fund IYR 20% ishares S&P GSCI Commodity-Indexed Trust JPMorgan Chase & Co. 4 years Underlying Index: The JPMorgan ETF Efficiente 5 Index Principal Return at Maturity: 100% Coupon: Annual, as defined to the left Minimum Coupon: [0.00%-0.25%] GSG 10% SPDR Gold Trust GLD 10% Inflation/Cash ishares Barclays TIPS Bond Fund TIP 50% 50% JPMorgan Cash Index USD 3 Month 50% 13
C A S E S T U D Y : E T F E F F I C I E N T E C E R T I F I C A T E O F D E P O S I T Cross Asset Opportunities J.P. Morgan Algorithmic Indices Hypothetical and actual annualized returns: Apr 30, 2002 Apr 30, 2012 Index Name Asset Class Ticker 2012 YTD 3yr (annualized) 5yr (annualized) 10yr (annualized) Optimax Market-Neutral Commodiites CMDTOMER 4.57% 3.66% 0.95% 4.19% Dividend Aristocrats Daily Risk Control 8% ER Large Cap Domestic Equity SPXD8UE 4.24% 7.78% 2.17% 3.40% ETF Efficiente 5 Multi-Asset EEJPUS5E 1.44% 9.25% 5.67% 6.71% Asia-Pacific Equity Rotator 5 Asia Equity CIJPAER5 1.30% 3.47% 4.44% 5.12% Alternative Index Multi-Strategy 5 Alternatives AIJPM5UE -1.33% -0.70% 2.43% 6.34% 14
C A S E S T U D Y : E T F E F F I C I E N T E C E R T I F I C A T E O F D E P O S I T Disclaimer This presentation is for discussion purposes only and is not intended to be an offer to sell or the solicitation of an offer to buy any securities issued by JPMorgan. In the event JPMorgan were to offer structured investments, this presentation will be superseded and replaced in its entirety by a preliminary or final term sheet or pricing supplement, and the documents therein which would be filed with the SEC. In the event of any inconsistency between the information presented herein and any such preliminary or final term sheet or pricing supplement, such preliminary or final term sheet or pricing supplement shall govern. Copyright 2012 JPMorgan Chase & Co. All rights reserved. The presentation was developed, compiled, prepared and arranged by JPMorgan through the expenditure of substantial time, effort and money and constitutes valuable intellectual property and trade secrets of JPMorgan. All right, title, and interest in and to the presentation is vested in JPMorgan and the presentation cannot be used without JPMorgan s prior written consent. Information herein is believed to be reliable but JPMorgan does not warrant its completeness or accuracy. The information contained in this presentation has been distributed to you on a stand alone basis and is not to be combined with, consolidated, incorporated or otherwise used with any other written materials provided by JPMorgan. IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with JPMorgan Chase & Co. of any of the matters address herein or for the purpose of avoiding U.S. tax-related penalties. Investment suitability must be determined individually for each investor, and the financial instruments described herein may not be suitable for all investors. The products described herein should generally be held to maturity as early unwinds could result in lower than anticipated returns. This information is not intended to provide and should not be relied upon as providing accounting, legal, regulatory or tax advice. Investors should consult with their own advisors as to these matters. This material is not a product of JPMorgan Research Departments. Structured Investments may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. JPMorgan and its affiliates may have positions (long or short), effect transactions or make markets in securities or financial instruments mentioned herein (or options with respect thereto), or provide advice or loans to, or participate in the underwriting or restructuring of the obligations of, issuers mentioned herein. JPMorgan is the marketing name for JPMorgan Chase & Co. and its subsidiaries and affiliates worldwide. J.P. Morgan Securities Inc. is a member of FINRA, NYSE and SIPC. Clients should contact their salespersons at, and execute transactions through, a JPMorgan entity qualified in their home jurisdiction unless governing law permits otherwise. 15
J P M O R G A N S T R U C T U R E D I N V E S T M E N T S Agenda J.P. Morgan Structured Investments Overview 2 Case Study: ETF Efficiente Certificate of Deposit 7 Case Study: Buffered Return Enhanced Notes 16 Case Study: Tail-risk Hedge through Volatility 22 16
C A S E S T U D Y : B U F F E R E D R E T U R N E N H A N C E D N O T E S Controlling Portfolio Volatility with Buffered Return Enhanced Notes Summary Buffered Return Enhanced Note Linked to the S&P 500 Buffered Return Enhanced Notes (BRENs) have become a staple structure for RIAs and Private Banks within their equity allocations 30% 20% BREN Linked to SPX SPX Generally, BRENs are used to articulate a view, which can mean: Lever returns deemed likely to occur, Protect against sell-offs deemed possible to occur, and/or Cap returns deemed unlikely to occur BRENs can reduce overall portfolio volatility throughout the market cycle 10% 0% -30% -10% -20% -10% 0% 10% 20% 30% -20% -30% Change in index at maturity (%) SPX BREN vs. Direct Investment BREN linked to SPX Investment in SPX* 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 17 Example: 48124AL62 Start: 10/26/10 End: 4/25/12 SPX Return: 11.23% (ann) Leverage: 2x BREN Return: 11.04% (ann) Summary Analysis BRENs SPX Avg Returns (p.a.) 7.47% 7.74% Std Deviation 9.77% 16.52% *Source: JPMorgan, past performance does not guarantee future return: Investment in SPX reflects price performance only
C A S E S T U D Y : B U F F E R E D R E T U R N E N H A N C E D N O T E S Building blocks of the J.P. Morgan SI platform Active Management Alpha can be generated from multiple sources including quantitative, fundamental, proprietary and third party managers Passive Strategies (ETFs) ETFs are used to implement tactical allocations or dial down the active risk exposure in parts of your portfolio Structured Products The structures are an additional source of alpha tailored to your investment view, risk tolerance, and diversification goals Integrated Portfolio The result is a recommended equity portfolio that provides an efficient combination of risk and expected return The J.P. Morgan platform provides diversified sources of alpha 18
C A S E S T U D Y : B U F F E R E D R E T U R N E N H A N C E D N O T E S Diversified Growth Model Mutual Fund Model Allocations Integrated Model Allocations cash, 5% LC Grow th, 10% cash, 5% LC Grow th, 10% LC Blend, 6% LC Blend, 3% SPX BREN, 3% LC Val, 7% LC Val, 7% Fixed Income, 42% Mid Grow th, 5% Mid Val, 5% OTHER, 54% Mid Grow th, 5% Mid Val, 5% Alt, 6% Sm Grow th, 3% Sm Val, 3% EM, 2% REIT, 6% Small, 5% RTY BREN, 1.0% Foreign, 2% EFA BREN, 0.5% Asset Class Allocation Large Cap Domestic Growth 10% Large Cap Domestic Blend 6% Large Cap Domestic Value 7% Mid Cap Domestic Growth 5% Mid Cap Domestic Value 5% Small Cap Domestic Growth 3% Small Cap Value 3% Small Cap Foreign / Emerging Markets 2% REIT 6% Alternatives 6% Fixed Income 42% Cash 5% Asset Class Allocation Large Cap Domestic Growth 10% Large Cap Domestic Blend 3% SPX BREN 3% Large Cap Domestic Value 7% Mid Cap Domestic Growth 5% Mid Cap Domestic Value 5% Small Cap Domestic Growth 2.5% Small Cap Value 2.5% Russell 2000 BREN 1.0% Small Cap Foreign / Emerging Markets 1.5% EFA BREN 0.5% OTHER (FI and Alt) 54% Cash 5% 19
C A S E S T U D Y : B U F F E R E D R E T U R N E N H A N C E D N O T E S 18-month BREN linked to the S&P 500 Index Linked to the performance of the S&P 500 Index, 10% buffer, 150% participation, [14%-18%] max return Features If the Ending Index Level is greater than the Initial Index Level, you will receive a cash payment that provides you with a return per $1,000 principal amount note equal to the Index Return multiplied by 1.5, subject to a Maximum Total Return on the notes Your principal is protected against up to a 10.00% decline of the Index at maturity. If the Ending Index Level declines from the Initial Index Level by up to 10.00%, you will receive the principal amount of your notes at maturity If the Ending Index Level declines from the Initial Index Level by more than 10.00%, you will lose 1.00% of the principal amount of your notes for every 1.00% that the Index declines beyond 10.00% BREN return at maturity ($1,000 investment) $1,300 $1,200 $1,100 $1,000 $900 $800 $700 Index Performance -30% -20% -10% 0% 10% 20% 30% Note: Graph assumes a maximum return of 14.00%. Note Payoff at Maturity Terms Issuer: Tenor: Underlying Index: Upside Leverage Factor: 1.5 Considerations JPMorgan Chase & Co. 18 months S&P 500 Index Maximum Total Return: [14.00%-18.00%]* Buffer: 10.00% * The Maximum Total Return will be determined on the Pricing Date and will not be less than 14.00% or greater than 18.00%. Offers diversified leveraged exposure to equity markets through the S&P 500 Index Reduced downside risk with a 10.00% static buffer at maturity Your investment may result in a loss of up to 90% of your principal Long-term capital gains tax treatment if held longer than one year Return is limited to the principal amount plus the Maximum Total Return, payable at maturity Payment on the notes at maturity is subject to the credit risk of JPMorgan Chase & Co. No interest payments, dividend payments or voting rights The note will not exactly track the underlying Index prior to maturity 20
C A S E S T U D Y : B U F F E R E D R E T U R N E N H A N C E D N O T E S Disclaimer SEC Legend: JPMorgan Chase & Co. has filed a registration statement (including a prospectus) with the SEC for any offerings to which these materials relate. Before you invest, you should read the prospectus in that registration statement and the other documents relating to this offering that JPMorgan Chase & Co. has filed with the SEC for more complete information about JPMorgan Chase & Co. and this offering. You may get these documents without cost by visiting EDGAR on the SEC Web site at www.sec.gov. Alternatively, JPMorgan Chase & Co., any agent or any dealer participating in the this offering will arrange to send you the prospectus and each prospectus supplement as well as any product supplement and term sheet if you so request by calling toll-free 866-535-9248. IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with JPMorgan Chase & Co. of any of the matters address herein or for the purpose of avoiding U.S. tax-related penalties. Investment suitability must be determined individually for each investor, and the financial instruments described herein may not be suitable for all investors. The products described herein should generally be held to maturity as early unwinds could result in lower than anticipated returns. This information is not intended to provide and should not be relied upon as providing accounting, legal, regulatory or tax advice. Investors should consult with their own advisors as to these matters. This material is not a product of JPMorgan Research Departments. Structured Investments may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. JPMorgan and its affiliates may have positions (long or short), effect transactions or make markets in securities or financial instruments mentioned herein (or options with respect thereto), or provide advice or loans to, or participate in the underwriting or restructuring of the obligations of, issuers mentioned herein. JPMorgan is the marketing name for JPMorgan Chase & Co. and its subsidiaries and affiliates worldwide. J.P. Morgan Securities Inc. is a member of FINRA, NYSE and SIPC. Clients should contact their salespersons at, and execute transactions through, a JPMorgan entity qualified in their home jurisdiction unless governing law permits otherwise. 21
J P M O R G A N S T R U C T U R E D I N V E S T M E N T S Agenda J.P. Morgan Structured Investments Overview 2 Case Study: ETF Efficiente Certificate of Deposit 7 Case Study: Buffered Return Enhanced Notes 16 Case Study: Tail-risk Hedge through Volatility 22 22
C A S E S T U D Y : T A I L - R I S K H E D G E T H R O U G H V O L A T I L I T Y Annual Returns and Intra-year Declines of the S&P 500 Index Source: Standard and Poor s, FactSet, J.P. Morgan Asset Management. Returns are based on price index only and do not include dividends. Intra-year drops refers to the largest market drops over periods of 6 months or less. For illustrative purposes only. Data are as of 3/31/12. 23
C A S E S T U D Y : T A I L - R I S K H E D G E T H R O U G H V O L A T I L I T Y 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 VIX 30-day return Volatility as an Asset Class But while most investors care about volatility only when markets go down and their portfolio loses value, volatility works both ways. And smart investors are figuring out ways to smooth out the peaks and valleys. Paul Sullivan, NY Times 8/12/11 Long exposure to volatility could provide increasing levels of portfolio protection exactly when investors most need such protection. The asymmetric profile provided by volatility means that a relatively small allocation of capital can provide meaningful protection. Clifford W. Stanton, CFA Volatility as an Asset Class Market sell-offs typically result in volatility spikes as investors purchase protection via put options Volatility spikes Tend to be large in magnitude Tend to mean-revert over time 400 SPX VIX Negative Correlation between SPX and VIX (Jan 98 Feb 12) 350 300 250 200% 150% 100% 7/26/11-8/23/11 SPX Return: -12.73% Vix Return: +79.29% 200 50% 150 0% 100 (50)% 50 (100)% 0 (40)% (30)% (20)% (10)% 0% 10% 20% 30% SPX 30-day return Source: J.P. Morgan. Past performance is not a guide to future performance. VIX Index refers to the performance of CBOE SPX Volatility Index (Bloomberg: VIX Index). SPX Index refers to the performance of S&P 500 Index (Bloomberg: SPX Index). 24
C A S E S T U D Y : T A I L - R I S K H E D G E T H R O U G H V O L A T I L I T Y Accessing Volatility for the Portfolio Market Update VIX Index itself is not tradeable VIX Options and Futures Open Interest (Vega $MM) 2004: First futures contracts on CBOE listed 2006: Options contracts created for trading 2008: Huge increase in open interest in VIX futures and options as a hedging tool during the crisis 2009: Barclay s Capital launches ETNs that track futures contracts Strategies that rely on rolling futures are influenced significantly by the shape of the futures curve ( backwardation vs. contango ) 2010: JPMorgan creates Strategic Volatility Index (ticker: JPUSSTVL) for dynamic exposure to VIX futures 800 700 600 500 400 300 200 100 0 Apr- 07 Sep- 07 Feb- 08 VIX Options Open Interest VIX Futures Open Interest Jun- 08 Nov- 08 Apr- 09 Sep- 09 Jan- 10 Jun- 10 Nov- 10 Apr- 11 Aug- 11 Jan- 12 Explosion of Exchange Traded Products - Currently more than 40 ETPs on VIX Growth of VIX Exchange Traded Products ($mm) Nearly $5bn in total assets Greatest concetration are in assets that are in shortterm futures (~$3bn) and are long-only ($2.4bn) VXX: $1.8bn in assets TVIX: $500mm in assets VXZ: $300mm in assets (medium term) 6,000 5,000 4,000 Total Assets ($mm) The JPMorgan Strategic Volatility Index implements a short position in VIX futures when the market is stable to offset impact of negative beta and negative roll yield Long the 2m VIX futures contract at all times Short the 1m VIX futures contract when curve is in contango Source: J.P. Morgan Equity Derivatives Strategy, Bloomberg 25 3,000 2,000 1,000 0 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Jan-11 Jun-11 Nov-11 Apr-12
C A S E S T U D Y : T A I L - R I S K H E D G E T H R O U G H V O L A T I L I T Y Accessing Volatility for the Portfolio The JPMorgan Strategic Volatility Index implements a short position in VIX futures when the market is stable to offset impact of negative roll yield 140 120 100 80 60 40 20 VIX Index Barclays VXX ETN 0 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Equity markets stable/in recovery March 19 th 2012 Equity markets in distress August 8 th 2011 28 26 VIX Futures Curve 50 45 VIX Futures Curve 24 22 20 18 16 14 VIX Index 1m 2m 3m 4m 5m 6m 7m 8m 40 35 30 25 20 15 10 VIX Index 1m 2m 3m 4m 5m 6m 7m 8m Source: J.P. Morgan. Past performance is not a guide to future performance. VIX Index refers to the performance of CBOE SPX Volatility Index (Bloomberg: VIX Index). VXX ETN refers to the performance of the ipaths&p 500 VIX Short-Term Futures ETN (Bloomberg: VXX Equity). 26
JPMorgan Strategic Volatility Index Simulated Performance Details J.P. Morgan Strategic Volatility Index Simulated Performance Bloomberg JPUSSTVL Index Strategic Volatility Index (lhs) S&P 500 (lhs) normalised to Sep-06 Front end short position (rhs) 5 biggest S&P 1-day drops 700 Date 600 500 450% Perf SPX Perf Strat Vol 10/15/2008 (9.03)% 10.69% 400% 12/1/2008 (8.93)% 10.75% 350% 09/29/2008 (8.79)% 12.91% 300% 400 10/09/2008 (7.62)% 6.74% 250% 300 11/20/2008 (6.71)% 5.02% 200% 150% 200 100% 50% Dec-11 Sep-11 Jun-11 Mar-11 Dec-10 Sep-10 Jun-10 Mar-10 Dec-09 Sep-09 Jun-09 Mar-09 Dec-08 Sep-08 Jun-08 Mar-08 Dec-07 Sep-07 Jun-07 Mar-07 0% Dec-06 0 Sep-06 CASE STUDY: TAIL-RISK HEDGE THROUGH VOLATILITY 100 2007 JPUSSTVL Index SPX Index 2008 JPUSSTVL Index Jan 2.49% 1.41% Jan (5.42%) Feb (7.47%) (2.18%) Feb 1.43% Mar (8.54%) 1.00% Mar (3.48%) Apr 3.30% 4.33% Apr 3.67% May 2.68% 3.25% May 10.41% Jun (4.13%) (1.78%) Jun (8.25%) Jul 3.77% (3.20%) Jul (9.72%) Aug 11.89% 1.29% Aug 5.42% Sep (8.04%) 3.58% Sep 4.32% Oct 5.16% 1.48% Oct 75.78% Nov (6.17%) (4.40%) Nov 19.55% Dec 5.15% (0.86%) Dec (3.63%) Full Year (2.28%) 3.53% Full Year 95.49% SPX Index (6.12%) (3.48%) (0.60%) 4.75% 1.07% (8.60%) (0.99%) 1.22% (9.08%) (16.94%) (7.48%) 0.78% (38.49%) 2009 JPUSSTVL Index SPX Index Jan (3.47%) (8.57%) Feb 10.25% (10.99%) Mar 4.32% 8.54% Apr (0.97%) 9.39% May 3.13% 5.31% Jun 4.59% 0.02% Jul 7.66% 7.41% Aug 4.09% 3.36% Sep 7.14% 3.57% Oct (1.49%) (1.98%) Nov 9.04% 5.74% Dec 6.20% 1.78% Full Year 62.43% 23.45% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Full Year JPUSSTVL Index SPX Index 2011 (0.17%) (3.70%) Jan 4.40% 2.85% Feb 6.10% 5.88% Mar (0.46%) 1.48% Apr 0.98% (8.20%) May (11.52%) (5.39%) Jun 10.16% 6.88% Jul 8.03% (4.74%) Aug 7.50% 8.76% Sep 5.97% 3.69% Oct (2.19%) (0.23%) Nov 1.63% 6.53% Dec 32.55% 12.78% Full Year JPUSSTVL Index (1.73%) (0.53%) (6.12%) 6.30% 1.08% (4.08%) (10.24%) 34.04% 23.44% (20.11%) 2.67% (2.84%) 11.94% 2.26% 3.20% (0.10%) 2.85% (1.35%) (1.83%) (2.15%) (5.68%) (7.18%) 10.77% (0.51%) 0.85% 0.00% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 5.42% 6.32% 5.54% (1.24%) (3.84%) 12.34% SPX Index 4.36% 4.06% 3.29% (0.63%) (5.86%) Source: J.P. Morgan. Past performance is not a guide to future performance. SPX Index refers to the performance of S&P 500 Index (Bloomberg: SPX Index). JPUSSTVL Index refers to the performance of J.P. Morgan Strategic Volatility Index (Bloomberg: JPUSSTVL Index). 4.64% 2010 SPX Index 2012 JPUSSTVL Index 27 YTD
C A S E S T U D Y : T A I L - R I S K H E D G E T H R O U G H V O L A T I L I T Y Sample Portfolio Performance Comparison Equity/Bond Portfolio with J. P. Strategic Volatility Index incorporated Hypothetical Portfolio Construction ishares Barclays Aggregate Bond Fund (Ticker: AGG) S&P 500 Index Price Return Equity Index (Ticker: SPX) J.P. Morgan Strategic Volatility Index (Ticker: JPUSSTVL) Weights per Strategy 2008 2009 60% Bonds 40% Equity 55% Bonds 40% Equity 5% JPM SV 50% Bonds 40% Equity 10% JPM SV 60% Bonds 30% Equity 10% JPM SV (13.60)% (8.97)% (4.35)% (0.20)% 5.99% 12.44% 18.27% 15.96% 2010 6.07% 10.34% 13.80% 12.89% 2011 2.96% 4.56% 5.76% 6.05% 2012 YTD 2.03% 4.15% 5.71% 5.37% Ann. Performance 0.46% 4.82% 8.65% 9.00% Ann. Volatility 9.50% 8.93% 10.49% 9.80% Sharpe Ratio 0.048 0.540 0.824 0.918 20% 15% 10% 5% 0% (5%) (10%) (15%) (20%) 60/40 55/40/5 50/40/10 60/30/10 2008 2009 2010 2011 160 150 60/40 55/40/5 140 50/40/10 60/30/10 130 120 110 100 90 80 70 60 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Source: J.P. Morgan. Past performance is not a guide to future performance. ¹ From January 1, 2008 to May 21, 2012 28
C A S E S T U D Y : T A I L - R I S K H E D G E T H R O U G H V O L A T I L I T Y 15-month Strategic Volatility Note Linked to the performance of the JPMorgan Strategic Volatility Index Features The JPMorgan Strategic Volatility Index is a synthetic, dynamic strategy that aims to replicate the returns from combining a long position and a contingent short position in futures contracts on the CBOE Volatility Index rolled throughout each month The synthetic long position rolls from the second- month VIX futures contract into the third month VIX futures contract. When activated, the synthetic short position rolls from the first month VIX futures contract into the second-month VIX futures contract. Exposure to the synthetic short position will vary between 0% and 100%. May be appropriate for investors seeking exposure to equity volatility through synthetic long and short positions in VIX futures contracts. Note return at maturity ($1,000 investment) Index Return Note Return Payment at Maturity 70.0% 70.0% $1,700.00 60.0% 60.0% $1,600.00 50.0% 50.0% $1,500.00 40.0% 40.0% $1,400.00 30.0% 30.0% $1,300.00 15.0% 15.0% $1,500.00 5.0% 5.0% $1,050.00 0% 0% $1,000.00-10.0% -10.0% $900.00-20.0% -20.0% $800.00-30.0% -30.0% $700.00-50.0% -50.0% $500.00-70.0% -70.0% $300.00 Terms Issuer: Tenor: Underlying Index: Underlying Ticker: Maximum Total Return: Considerations Offers exposure to VIX futures via the JPMorgan Strategic Volatility Index Potential for long term capital gains tax treatment if held longer than one year Your investment in the notes may result in a loss Payment on the notes is subject to the credit risk of JPMorgan Chase & Co. Index return net of 0.75 bps p.a. index fee Daily liquidity provided via the Issuer JPMorgan Chase & Co. 15 months JPMorgan Strategic Volatility Index JPUSSTVL n/a 29
C A S E S T U D Y : T A I L - R I S K H E D G E T H R O U G H V O L A T I L I T Y 15-month Note linked to Strategic Volatility and the S&P 500 Linked to the performance of a basket of the JPMorgan Strategic Volatility Index and the S&P 500 Index Features Provides exposure to a weighted basket consisting of the S&P 500 Index and the JPMorgan Strategic Volatility Index The JPMorgan Strategic Volatility Index is a synthetic, dynamic strategy that aims to replicate the returns from combining a long position and a contingent short position in futures contracts on the CBOE Volatility Index rolled throughout each month May be appropriate for investors seeking exposure to large cap domestic equity markets as well as equity volatility through synthetic long and short positions in VIX futures contracts. Terms Issuer: Tenor: Underlying Basket: Underlying Tickers: Maximum Total Return: JPMorgan Chase & Co. 15 months 80% S&P 500 Index 20% JPMorgan Strategic Volatility Index SPX, JPUSSTVL n/a Considerations Offers exposure to domestic equity markets via the S&P 500 Index S&P 500 Index and 80/20 Portfolio: September 2006 May 2012 2800 Offers exposure to VIX futures via the JPMorgan Strategic Volatility Index 2400 Potential for long term capital gains tax treatment if held longer than one year Your investment in the notes may result in a loss Payment on the notes is subject to the credit risk of JPMorgan Chase & Co. 2000 1600 1200 800 Strategic Volatility Index return net of 0.75 bps p.a. index fee Daily liquidity provided via the Issuer 400 Sep 06 Mar 07 Sep 07 Mar 08 Sep 08 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Source: J.P. Morgan. Past performance is not a guide to future performance. SPX Index refers to the performance of S&P 500 Index (Bloomberg: SPX Index). JPUSSTVL Index refers to the performance of J.P. Morgan Strategic Volatility Index (Bloomberg: JPUSSTVL Index). 30
C A S E S T U D Y : T A I L - R I S K H E D G E T H R O U G H V O L A T I L I T Y Portfolio Fit: How to Approach an Allocation Advisors have positioned a note linked to Strategic Volatility within their Large Cap Domestic Equity allocation; e.g., allocating 20% of that sleeve to the Index S&P 500 Index and 80/20 Porftolio: September 2006 March 2012 2800 2400 2000 1600 Interval 1 Interval 2 Interval 3 1200 800 400 Sep 06 Mar 07 Sep 07 Mar 08 Sep 08 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Scenario Analysis Interval 1 03/03/08-6/02/09 Interval 2 09/01/09-12/01/10 Interval 3 11/30/10-03/01/12 S&P 500 Index -29.04% 20.84% 16.39% JPMorgan Strategic Volatility Index 133.32% 63.76% 29.03% 80% / 20% Portfolio Return 1.96% 40.54% 23.17% Approx. Alpha 31.00% 19.74% 6.78% S&P 500 Index Volatility 41.68% 18.07% 21.17% S&P 500 Index Sharpe Ratio -0.697 1.153 0.774 Portfolio Volatility 21.83% 16.94% 17.80% Portfolio Sharpe Ratio 0.090 2.393 1.302 Source: J.P. Morgan. Past performance is not a guide to future performance. SPX Index refers to the performance of S&P 500 Index (Bloomberg: SPX Index). JPUSSTVL Index refers to the performance of J.P. Morgan Strategic Volatility Index (Bloomberg: JPUSSTVL Index). 31
C A S E S T U D Y : T A I L - R I S K H E D G E T H R O U G H V O L A T I L I T Y The JPMorgan Strategic Volatility Index Strategic Volatility Index Pros Gives a long volatility exposure during distressed situations in the equities market Monetising the dislocation of the front end of the forward starting volatility curve in an upward trended market Cons Not as reactive to spikes in very short term volatility compared to a pure long volatility exposure Mark to market can suffer from very short term volatility spikes Purely systematic strategy that tracks an algorithm based on VIX Futures closing levels Neutral/positive carry when the volatility curve is upward sloping Very low correlation to the equity market efficient diversification can be achieved 32
C A S E S T U D Y : T A I L - R I S K H E D G E T H R O U G H V O L A T I L I T Y Disclaimer This presentation is for discussion purposes only and is not intended to be an offer to sell or the solicitation of an offer to buy any securities issued by JPMorgan. In the event JPMorgan were to offer structured investments, this presentation will be superseded and replaced in its entirety by a preliminary or final term sheet or pricing supplement, and the documents therein which would be filed with the SEC. In the event of any inconsistency between the information presented herein and any such preliminary or final term sheet or pricing supplement, such preliminary or final term sheet or pricing supplement shall govern. Copyright 2012 JPMorgan Chase & Co. All rights reserved. The presentation was developed, compiled, prepared and arranged by JPMorgan through the expenditure of substantial time, effort and money and constitutes valuable intellectual property and trade secrets of JPMorgan. All right, title, and interest in and to the presentation is vested in JPMorgan and the presentation cannot be used without JPMorgan s prior written consent. Information herein is believed to be reliable but JPMorgan does not warrant its completeness or accuracy. The information contained in this presentation has been distributed to you on a stand alone basis and is not to be combined with, consolidated, incorporated or otherwise used with any other written materials provided by JPMorgan. IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with JPMorgan Chase & Co. of any of the matters address herein or for the purpose of avoiding U.S. tax-related penalties. Investment suitability must be determined individually for each investor, and the financial instruments described herein may not be suitable for all investors. The products described herein should generally be held to maturity as early unwinds could result in lower than anticipated returns. This information is not intended to provide and should not be relied upon as providing accounting, legal, regulatory or tax advice. Investors should consult with their own advisors as to these matters. This material is not a product of JPMorgan Research Departments. Structured Investments may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. JPMorgan and its affiliates may have positions (long or short), effect transactions or make markets in securities or financial instruments mentioned herein (or options with respect thereto), or provide advice or loans to, or participate in the underwriting or restructuring of the obligations of, issuers mentioned herein. JPMorgan is the marketing name for JPMorgan Chase & Co. and its subsidiaries and affiliates worldwide. J.P. Morgan Securities Inc. is a member of FINRA, NYSE and SIPC. Clients should contact their salespersons at, and execute transactions through, a JPMorgan entity qualified in their home jurisdiction unless governing law permits otherwise. 33