How do you lose

$2 billion dollars?

Traders use models to determine “fair value”

“And then that happened…”

Hedging reduces risk

0 25 50 75 100-$60

-$40

-$20

$0

$20

$40

$60

Married Put Option - 50 put, $50 stock

StockPutOverall

Profi

t/Lo

ss

Stock Price

max loss!

So now. JPMorgan.

“This trading may not have violated the Volcker Rule, but it violated the Dimon principle.”

Step 1: Invest excess deposits in high-grade corporate bonds

These companies wouldn’t default…

Beware of systematic risk.

Step 2: Prudently hedge with credit default swaps

$

t0

t1 t3t2 t4 t5

tn

Protection buyer

Protection seller

$ $$ $

(meaning, buy insurance)

Oh, wait.

No double-dip recession!

European Central Bank backstopping European banks!

Step 3: SELL insurance.

Eesh

Fairly normal

1 + 1 = 5

Step 4: Go big or go home

“Markets can remain irrational longer than you and I can remain solvent.”

-John Maynard Keynes (maybe)

“In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed, and poorly monitored…”

-Jamie Dimon

$JPM stock -23%