Schaeffer's Trading Floor Blog

My Take on JPMorgan Chase's 'Hedge'

Attempting to break down JPM's bad bets

by 5/15/2012 12:10 PM
Stocks quoted in this article:

I have been reading a lot of articles about JPMorgan Chase's (JPM) supposed "hedge" and how it "didn't work out as planned." Specifically, I have been trying to figure out exactly what they did, and, in basic terms, I think it was something like this:

  1. JPM purchased a lot of corporate debt.

  2. JPM hedged this corporate debt by purchasing some credit default swaps that make money if their original investment declines in value.

  3. JPM "hedged their hedge" by making highly leveraged bets related to the same corporate debt they originally invested in.

So, basically, No. 3 is the trade that blew up and lost the company $2 billion. This was not a hedge. Instead of reducing their credit default swap hedges, they added leverage bets correlated to their primary corporate debt exposure. A hedge reduces risk and reward. This trade increased risk and reward for the overall company.

It will be interesting to see what the fallout from this will ultimately be with regard to legislation and CEO Jamie Dimon's reputation, but for now I'll be happy if I just stop hearing the word "hedge."

permanent link

Partner Center

© 2015 Schaeffer's Investment Research, Inc. 5151 Pfeiffer Road, Suite 250, Cincinnati, Ohio 45242 Phone: (800) 448-2080 FAX: (513) 589-3810 Int'l Callers: (513) 589-3800 Email:

All Rights Reserved. Unauthorized reproduction of any SIR publication is strictly prohibited.

Market Data provided by | Data delayed 15-20 minutes unless otherwise indicated.