JP Morgan in Australia has launched the ASX 20+ Series 2 structured product, which is designed to provide exposure to Australian equities and a hedge fund through two dynamic portfolios. The seven-year 100% principal protected product's dynamic portfolios are designed to provide exposure to the premium asset in each portfolio of up to 200% and achieve principal protection by actively allocating exposure between the premium asset and a cash asset. The bank is also offering a geared version of the product where the investor enters into a limited recourse loan. In the first portfolio, the premium asset comprises a basket of 20 of the largest ASX-listed shares equally weighted by value, while the second portfolio comprises the FRM Diversified III Master Fund Limited Class M US dollar Shares. For both portfolios, the cash asset is a notional investment in cash that earns a return based on Australian dollar swap rates. The product will lock-in 20% of the growth in the equity portfolio at the end of years four, five and six. The lock-in amount will be the greater of 20% of the growth in the portfolio for that year and the previous lock-in amount. The second portfolio will pay an annual coupon capped at 10% and uncapped in year seven. The dynamic portfolio rules work on the basis of two concepts, an investment floor that represents the cost to buy a cash asset that would pay out an amount equal to the greater of the notional dynamic portfolio value or the lock-in value. The rules require that the notional investment in the premium asset is maintained at a level equal to a constant multiple or proportion of the cushion. The constant proportion has been determined by reference to the price volatility of the relevant asset and represents the size of a rapid fall in the value of the asset required for the portfolio value to fall to the investment floor (the crash size). The allocation between the premium and the cash asset within the dynamic portfolio is determined on each rebalancing date and, if required, rebalanced in accordance with the dynamic portfolio rules. Instead of waiting for the dynamic portfolio value to fall to the investment floor, a gradual rebalancing is made as the performance of the premium asset and the dynamic portfolio value rises and falls....
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