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JPMorgan Funds
Notes to the Financial Statements (continued)
As at 30 June 2008
The SICAV writes options on securities, futures and interest rate swaps (“swaptions ”). These options are settled in cash and subject the SICAV to unlimited risk of loss. The
SICAV, however, is not subject to credit risk on written options as the counterparty has already performed its obligation by paying the premium at the inception of the contract. As
of 30 June 2008, the SICAV had written options contracts outstanding as listed on its Schedule of Investments.
h) Total Return Swaps
The SICAV may enter into swap contracts in which the SICAV and the counterparty agree to exchange payments where one or both parties pay the returns generated by a security,
instrument, basket or index thereof. The payments made by the SICAV to the counterparty and vice versa are calculated by reference to a specific security, index, or instruments and
an agreed upon notional amount. Any such underlying security or instrument must be a transferable security and any such index must be an index of a regulated market. The value of
the underlying securities shall be taken into account for the calculation of the investment and borrowing powers applicable to individual issuers. The relevant indices include, but are
not limited to, currencies, interest rates, prices and total return on interest rates indices, fixed income indices and stock indices.
Unrealised gains or losses are recorded under “Total Return Swaps at Market Value” in the Combined Statement of Net Assets. The changes in such amounts are included in the
Combined Statement of Operations and Changes in Net Assets under “Net Change in Unrealised Gain/(Loss) on Total Return Swaps”. When a contract is closed, the Realised
Gain/(Loss) is recorded under “Net Realised Gain/(Loss) on Total Return Swaps” in the Combined Statement of Operations and Changes in Net Assets.
i) Interest Rate Swaps
An interest rate swap is a bilateral agreement in which each of the parties agree to exchange a series of interest payments for another series of interest payments (usually
fixed/floating) based on a notional amount that serves as a computation basis and that is usually not exchanged.
The market values are recorded under “Interest Rate Swaps at Market Value” in the Combined Statement of Net Assets.
j) Credit Default Swaps
ACredit Default Swap is a credit derivative transaction in which two parties enter into an agreement, whereby one party pays the other a fixed periodic coupon for the specified life
of the agreement. The other party makes no payments unless a credit event, relating to a predetermined reference asset, occurs. If such an event occurs, the party will then make a
payment to the first party, and the swap will terminate. The value of the underlying securities shall be taken into account for the calculation of the investment and borrowing powers
applicable to individual issuers.
The market values are recorded under “Credit Default Swaps at Market Value” in the Combined Statement of Net Assets.
k) To Be Announced Securities (“TBA”)
TBAs are related to mortgage backed securities issued by government sponsored agencies. These agencies usually pool mortgage loans and sell interests in the pools created. TBAs
relate to future pools of these agencies that are bought and sold for future settlement for which either the interest rate or the maturity date is not yet fixed. TBAs are separately
disclosed in the Schedule of Investments.
The Sub-Funds may enter into Dollar Rolls, principally using To Be Announced (“TBA”) Securities, in which the Sub-Funds sell mortgage-backed securities for delivery in the
current month and simultaneously contract to repurchase similar, but not identical, securities at an agreed-upon price on a fixed date. The Sub-Funds account for such Dollar Rolls
as purchases and sales and receive compensation as consideration for entering into the commitment to repurchase. The Sub-Funds must maintain liquid securities having a value
not less than the repurchase price (including accrued interest) for such Dollar Rolls. The market value of the securities that the Sub-Funds are required to purchase may decline
below the agreed upon repurchase price of those securities.
The Sub-Funds had TBA Dollar Rolls outstanding as of 30 June 2008, which are included in Amounts Receivable on Sale of TBAs and Amounts Payable on Purchase of TBAs in
the Combined Statement of Net Assets.
l) Price Lock Swaps
The SICAV may enter into swap contracts in which the SICAV and the counterparty agree to exchange payments where one or both parties pay the price difference generated on a
security, instrument, basket or index thereof. The payments made by the SICAV to the counterparty and vice versa are calculated by the price difference (current asset price and
locked price) of a specific security, index, or other instruments and an agreed upon notional amount. Any such underlying security or instrument must be a transferable security and
any such index must be an index of a regulated market. The value of the underlying securities shall be taken into account for the calculation of the investment and borrowing powers
applicable to individual issuers. The relevant indices include, but are not limited to, currencies, interest rates, and other asset prices.
The market values are recorded under “Price Lock Swaps at Market Value” in the Combined Statement of Net Assets.
m) Forward Rate Agreements
AForward Rate Agreement is a forward contract in which one party pays a fixed interest rate, and receives a floating interest rate equal to a reference rate (the underlying rate). The
payments are calculated over a notional amount over a certain period, and netted. The reference rate is fixed one or two days before the termination date, dependent on the market
convention for the particular currency.
The market values are recorded under “Forward Rate Agreements at Market Value” in the Combined Statement of Net Assets.
n) Consolidation of Mauritian Subsidiary
All income, expenses, receivables, payables and investments of Flagship Indian Investment Company (Mauritius) Limited (the “Subsidiary”), a wholly-owned subsidiary of JPMorgan
Funds, are consolidated into the Combined Statement of Net Assets and the Combined Statement of Operations and Changes in Net Assets of JPMorgan Funds - JF India Fund. Securities
owned by the Subsidiary are individually disclosed in the Schedule of Investments of JPMorgan Funds - JF India Fund. Intercompany balances are eliminated on consolidation.
The use of the Mauritius Subsidiary and the tax treatment it is afforded, is based on the law and practice currently in force in the relevant countries, as understood by the Board of
Directors. It is subject to any future changes and such changes may adversely affect the returns of the Sub-Fund. This includes any circumstances where the India/Mauritius Double
Taxation Treaty may not be applied or ceases to be applied, resulting from, inter alia, any future ruling by the Indian tax authorities. Should the treaty not be applied, or cease to be
applied, interest on securities listed on an Indian stock exchange would be subject to tax at a maximum rate of 20%. Capital gains on disposal of such investments would be subject to tax
at rates of 0 to 30% in respect of listed securities depending on the length of time the relevant investment has been held.
3. Value of Financial Instruments and Associated Risks
The SICAV entered into forward foreign exchange contracts, financial futures contracts, options and swaps which, to varying degrees, represent a market risk in excess of the
amount reflected on the Combined Statement of Net Assets. The amount of the contracts represents the extent of the SICAV’s participation in these financial instruments. Market
risks associated with such contracts arise due to the possible movements in foreign exchange rates, indices, and security values underlying these instruments.
Investment in fixed income securities is subject to interest rate, sector, security and credit risks. High yield bonds are lower-rated securities and will usually offer higher yields to
compensate for the reduced creditworthiness or increased risk of default that these securities carry.
Other market and credit risks include the possibility that there may be an illiquid market for the contracts, that a change in the value of the contracts may not directly correlate with
changes in the value of the underlying currencies, indices, or securities, or that the counterparty to a contract defaults on its obligation to perform under the terms of the contract.
In emerging and less developed markets, in which some of the Sub-Funds will invest, the legal, judicial and regulatory infrastructure is still developing but there is much legal uncertainty both
for local market participants and their overseas counterparts. Some markets may carry higher risks for investors who should therefore ensure that, before investing, they understand the risks
involved and are satisfied that an investment is suitable as part of their portfolio. In some markets there may be no secure method of delivery against payment which would minimise the
exposure to counterparty risk. It may be necessary to make payment on a purchase or delivery on a sale before receipt of the securities or, as the case may be, sale proceeds.
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