JPMorgan Chase to sell zero-coupon notes linked to volatility index; Goldman links two to euro

By Sheri Kasprzak

New York, Oct. 3 – JPMorgan Chase & Co. announced plans earlier this week to price zero-coupon return notes linked to its J.P. Morgan Strategic Volatility Index.

The index provides long exposure to volatility index futures at the two-month point and provides investors with the potential to profit from the ‘negative roll yield’ associated with long VIX futures positions by activating a short position in VIX futures at the one-month point in certain market conditions, according to the investment bank’s description of the index.

The notes, which are due Jan. 26, 2016, at maturity will pay par plus the index return, which could be positive or negative.

The final index level will be the average of the closing index levels on five trading days ending Jan. 26, 2016.

Holders can request that the company repurchase their notes early. The payout will be par plus the index return minus a 0.5% repurchase fee. The issuer said it intends to accept all requests for repurchase but is not obligated to do so.

Long and short positions

The index aims to replicate the returns from combining a long position and a contingent short position in futures contracts on the CBOE Volatility index, or VIX index.

The index is rebalanced daily, and the index level incorporates a daily deduction of an index fee of 0.75% per year and a daily rebalancing adjustment amount that is equal to the sum of (a) a rebalancing adjustment factor of between 0.2% and 0.5% per day, depending on the level of the VIX index, applied to the aggregate notional amount of each of the VIX futures contracts hypothetically traded that day and (b) an additional amount equal to 0.2% and 0.5% per day, depending on the level of the VIX index, applied to the amount of the change, if any, in the level of the exposure to the synthetic short position.

The daily rebalancing adjustment amount is intended to approximate the “slippage costs” that would be experienced by a professional investor seeking to replicate the hypothetical portfolio contemplated by the index at prices that approximate the official settlement prices, which are not generally tradable, of the relevant VIX futures contracts.

Pricing is expected on Oct. 28 and settlement on Oct. 31.

Goldman links two to euro

Elsewhere in the market, Goldman Sachs Group, Inc. priced two euro-linked notes, one pitting the U.S. dollar against the European currency and the other the Mexican peso.

In the U.S. dollar-linked deal, Goldman priced $860,000 of the zero-coupon leveraged currency-linked notes, which are due Oct. 2, 2017.

The currency return will be positive if the final exchange rate is less than the initial exchange rate, which means it will take fewer dollars to purchase one euro at the final exchange rate compared to the initial rate.

The payout at maturity will be par plus 4.05 times any currency gain, subject to a maximum settlement amount of $1,405 per $1,000 principal amount. Investors will share in losses if the currency return is negative, with a minimum payout of zero.

Goldman Sachs & Co. was the underwriter with JPMorgan as the placement agent.

The notes are expected settle Oct. 10.

Peso deal ahead

Goldman is also on tap to price zero-coupon currency-linked notes to the peso relative to the euro.

If the currency return is greater than or equal to 0.75%, the payout at maturity will be the maximum settlement amount of $1,200 per $1,000 of notes.

If the return is greater than or equal to zero but less than 0.75%, the payout will be $1,050 per $1,000 principal amount.

Investors will receive par if the currency falls by up to 10% and will be fully exposed to any losses if the currency finishes below the 90% trigger level.

Goldman Sachs is the underwriter with JPMorgan as the placement agent.

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