JPM JP Morgan Chase and Co

How Do Exchange Rates Work?

Exchange rates reflect the amount of one currency that can be exchanged for a unit of another currency.

With respect to each Reference Currency, the Spot Rate is expressed as a number of Japanese yen per one unit of the applicable Reference Currency.

How Does the Reference Currency Return Formula Work?

Each Reference Currency Return reflects the return of the applicable Reference Currency relative to the Japanese yen from the Starting Spot Rate to the Ending Spot Rate, calculated using the formula set forth above under “Additional Key Terms — Reference Currency Return.” While each Reference Currency Return for purposes of the notes is determined using the formula set forth above under “Additional Key Terms — Reference Currency Return,” there are other reasonable ways to determine the return of a Reference Currency relative to the Japanese yen that would provide different results. For example, another way to calculate the return of a Reference Currency relative to the Japanese yen would be to calculate the return that would be achieved by converting Japanese yen into that Reference Currency at the Starting Spot Rate on the Pricing Date and then, on the final Ending Averaging Date, converting back into Japanese yen at the applicable Ending Spot Rate. In this pricing supplement, we refer to the return of a Reference Currency relative to the Japanese yen calculated using that method, which is not used for purposes of the notes, as a “conversion return.”

As demonstrated by the examples below, under the Reference Currency Return formula, any appreciation of a Reference Currency relative to the Japanese yen will be diminished, as compared to a conversion return, while any depreciation of a Reference Currency relative to the Japanese yen will be magnified, as compared to a conversion return. In addition, the diminishing effect on any appreciation of a Reference Currency relative to the Japanese yen increases as the applicable Reference Currency Return increases, and the magnifying effect on any depreciation of a Reference Currency relative to the Japanese yen increases as the applicable Reference Currency Return decreases. Accordingly, your payment at maturity may be less than if you had invested in similar notes that reflected conversion returns.

The following examples assume a Starting Spot Rate of 30 for the Turkish lira relative to the Japanese yen.

The Reference Currency Return is equal to 9.09%, calculated as follows:

(33 – 30) / 33 = 9.09%

By contrast, if the return on the Turkish lira were determined using a conversion return, the return would be 10.00%.

The Reference Currency Return is equal to 99.00%, which demonstrates the effective cap of 100% on the Reference Currency Return, calculated as follows:

(3,000 – 30) / 3,000 = 99.00%

By contrast, if the return on the Turkish lira were determined using a conversion return, which would not be subject to the effective cap of 100%, the return would be 9,900.00%.

As Examples 1 and 2 above demonstrate, the diminishing effect on any appreciation of a Reference Currency relative to the Base Currency increases as the applicable Reference Currency Return increases.

The Reference Currency Return is equal to -11.11%, calculated as follows:

(27 – 30) / 27 = -11.11%

By contrast, if the return on the Turkish lira were determined using a conversion return, the return would be -10.00%.

The Reference Currency Return is equal to -300.00%, which demonstrates that there is no limit on the downside for the Reference Currency Return, calculated as follows:

(7.50 – 30) / 7.50 = -300.00%

By contrast, if the return on the Turkish lira were determined using a conversion return, the return would be -75.00%.

As Examples 3 and 4 above demonstrate, the magnifying effect on any depreciation of a Reference Currency relative to the Base Currency increases as the applicable Reference Currency Return decreases.

The hypothetical Starting Spot Rate, Ending Spot Rates and Reference Currency Returns set forth above are for illustrative purposes only and have been rounded for ease of analysis.

What Is the Payment at Maturity on the Notes, Assuming a Range of Performances for the Basket?

The following table and examples illustrate the hypothetical total return and the hypothetical payment at maturity on the notes. The “total return” as used in this pricing supplement is the number, expressed as a percentage, that results from comparing the payment at maturity per $1,000 principal amount note to $1,000. Each hypothetical total return or payment at maturity set forth below assumes a Contingent Minimum Return of 38% and reflects the Contingent Buffer Percentage of -40%. The actual Contingent Minimum Return will be provided in the pricing supplement and will not be less than 38%. Each hypothetical total return or payment at maturity set forth below is for illustrative purposes only and may not be the actual total return or payment at maturity applicable to a purchaser of the notes. The numbers appearing in the following table and in the examples below have been rounded for ease of analysis.

Hypothetical Examples of Amount Payable at Maturity

The following examples illustrate how the total payment at maturity in different hypothetical scenarios is calculated.

Example 1: The level of the Basket increases from the Starting Basket Level of 100 to an Ending Basket Level of 105.

Because the Basket Return of 5% is positive and is less than the Contingent Minimum Return, the investor receives a payment at maturity of $1,380 per $1,000 principal amount note, calculated as follows:

$1,000 + ($1,000 × 38%) = $1,380

Example 2: The level of the Basket increases from the Starting Basket Level of 100 to an Ending Basket Level of 140.

Because Basket Return of 40% is positive and exceeds the Contingent Minimum Return of 38%, the investor receives a payment at maturity of $1,400 per $1,000 principal amount note, calculated as follows:

$1,000 + ($1,000 × 40%) = $1,400

Example 3: The level of the Basket decreases from the Starting Basket Level of 100 to an Ending Basket Level of 70.

Although the Basket Return is negative, because the Basket Return of -30% is greater than or equal to the Contingent Buffer Percentage of -40%, the investor receives a payment at maturity of $1,380 per $1,000 principal amount note, calculated as follows:

$1,000 + ($1,000 × 38%) = $1,380

Example 4: The level of the Basket decreases from the Starting Basket Level of 100 to an Ending Basket Level of 50.

Because the Basket Return is -50%, which is less than the Contingent Buffer Percentage of -40%, the investor receives a payment at maturity of $500 per $1,000 principal amount note, calculated as follows:

$1,000 + ($1,000 × -50%) = $500

The hypothetical returns and hypothetical payments on the notes shown above apply only if you hold the notes for their entire term. These hypotheticals do not reflect fees or expenses that would be associated with any sale in the secondary market. If these fees and expenses were included, the hypothetical returns and hypothetical payments shown above would likely be lower.

What Is the Basket Return, Assuming a Range of Performances for the Reference Currencies?

The examples below illustrate hypothetical Basket Returns, assuming a range of performances for the Reference Currencies. The hypothetical Basket Returns set forth below assume Starting Spot Rates of 35.00 and 30.00 for the Brazilian real and the Turkish lira, respectively, relative to the Japanese yen. The Basket Returns set forth below are for illustrative purposes only and may not be the actual Basket Returns applicable to the notes. You should consider carefully whether the notes are suitable to your investment goals. The numbers appearing in the examples below have been rounded for ease of analysis.

In this example, each of the Reference Currencies appreciated in value relative to the Japanese yen, resulting in Reference Currency Returns for each Reference Currency relative to the Japanese yen of 10% and 20%. Accordingly, the Basket Return is 15%.

In this example, each of the Reference Currencies depreciated in value relative to the Japanese yen, resulting in Reference Currency Returns for each Reference Currency relative to the Japanese yen of -10% and -20%. Accordingly, the Basket Return is -15%.

In this example, the Brazilian real appreciates in value relative to the Japanese yen, resulting in a Reference Currency Return of 99%, and the Turkish lira depreciated in value relative to the Japanese yen, resulting in a Reference Currency Return of -200%. Accordingly, the Basket Return is -50.50%. This example demonstrates that (a) no Reference Currency Return will be greater than 100% and (b) depreciation by one Reference Currency relative to the Japanese yen can result in a loss of some or all of your principal amount at maturity, even when the other Reference Currency appreciates significantly relative to the Japanese yen.

Selected Purchase Considerations

·          TAX TREATMENT — You should review carefully the section entitled “Material U.S. Federal Income Tax Consequences — Notes Treated as Open Transactions That Are Not Debt Instruments” in the accompanying product supplement no. 2-I.   The following discussion, when read in combination with that section, constitutes the full opinion of our special tax counsel, Davis Polk & Wardwell LLP, regarding the material U.S. federal income tax consequences of owning and disposing of the notes.

Based on current market conditions, in the opinion of our special tax counsel it is reasonable to treat the notes as “open transactions” that are not debt instruments for U.S. federal income tax purposes.  Assuming this treatment is respected, the gain or loss on your notes will generally be ordinary foreign currency income or loss under Section 988 of the Code.  Ordinary foreign currency losses are potentially subject to certain reporting requirements.  However, investors in certain forward contracts, futures contracts or option contracts generally are entitled to make an election to treat foreign currency gain or loss as capital gain or loss (a “Section 988 Election”).  Due to the lack of authority directly addressing the availability of the Section 988 Election for instruments such as these, it is unclear whether the Section 988 Election is available.  If the Section 988 Election is available and you make this election before the close of the day on which you acquire a note, all gain or loss you recognize on a sale or exchange of that note should be treated as capital gain or loss, and as long-term capital gain or loss if you have held the note for more than one year at that time.  A Section 988 Election with respect to a note is made by (a) clearly identifying the note on your books and records, on the date you acquire it, as being subject to this election and filing the relevant statement verifying this election with your U.S. federal income tax return or (b) obtaining independent verification under procedures set forth in the Treasury regulations under Section 988.  You should consult your tax adviser regarding the advisability, availability, mechanics and consequences of a Section 988 Election, as well as the special reporting requirements that apply to foreign currency losses in excess of specified thresholds.

The IRS or a court may not respect the treatment of the notes as “open transactions,” in which case the timing and character of any income or loss on the notes could be materially and adversely affected.  For instance, the notes could be treated as contingent payment debt instruments, in which case you would be required to accrue original issue discount on your notes in each taxable year at the “comparable yield,” as determined by us, although we will not make any payment with respect to the notes until maturity, and no Section 988 Election would be available.  In particular, in 2007 the IRS issued a revenue ruling holding that a financial instrument with some similarity to the notes is properly treated as a debt instrument denominated in a foreign currency.  The notes are distinguishable in some respects from the instrument described in the revenue ruling.  If the revenue ruling were applied to the notes, it could materially and adversely affect the tax consequences of an investment in the notes for U.S. Holders, possibly with retroactive effect. 

In addition, in 2007 Treasury and the IRS released a notice requesting comments on the U.S. federal income tax treatment of “prepaid forward contracts” and similar instruments.  The notice focuses in particular on whether to require investors in these instruments to accrue income over the term of their investment.  It also asks for comments on a number of related topics, including the character of income or loss with respect to these instruments; the relevance of factors such as the nature of the underlying property to which the instruments are linked; the degree, if any, to which income (including any mandated accruals) realized by non-U.S. investors should be subject to withholding tax; and whether these instruments are or should be subject to the “constructive ownership” regime, which very generally can operate to recharacterize certain long-term capital gain as ordinary income and impose a notional interest charge.  While the notice requests comments on appropriate transition rules and effective dates, any Treasury regulations or other guidance promulgated after consideration of these issues could materially and adversely affect the tax consequences of an investment in the notes, possibly with retroactive effect.  You should review carefully the section entitled “Material U.S. Federal Income Tax Consequences” in the accompanying product supplement and consult your tax adviser regarding the U.S. federal income tax consequences of an investment in the notes, including possible alternative treatments and the issues presented by this notice.

Withholding under legislation commonly referred to as “FATCA” may (if the notes are recharacterized as debt instruments) apply to amounts treated as interest paid with respect to the notes, as well as to payments of gross proceeds of a taxable disposition, including redemption at maturity, of a note. However, under a recent IRS notice, this regime will not apply to payments of gross proceeds (other than any amount treated as interest) with respect to dispositions occurring before January 1, 2019. You should consult your tax adviser regarding the potential application of FATCA to the notes.

Selected Risk Considerations

An investment in the notes involves significant risks. Investing in the notes is not equivalent to investing directly in the Reference Currencies, the Japanese yen or the respective exchange rates between the Reference Currencies and the Japanese yen or any contracts related to the Reference Currencies, the Japanese yen or the respective exchange rates between the Reference Currencies and the Japanese yen. These risks are explained in more detail in the “Risk Factors” section of the accompanying product supplement.

For example, one of the duties of JPMS, as calculation agent, involves determining the Starting Spot Rate for each Reference Currency in the manner set forth on the cover page of this pricing supplement. Although the calculation agent will make all determinations and will take all actions in relation to the establishment of the Starting Spot Rate for each Reference Currency in good faith, it should be noted that this discretion could have an impact (positive or negative) on the value of your notes. The calculation agent is under no obligation to consider your interests as a holder of the notes in taking any actions, including the determination of the Starting Spot Rate for each Reference Currency, that might affect the value of your notes. The Starting Spot Rate for each Reference Currency may vary, and may vary significantly, from the rates displayed in publicly available sources at any time on the Pricing Date.

The notes are not designed to be short-term trading instruments. Accordingly, you should be able and willing to hold your notes to maturity. See “— Lack of Liquidity” below.

Additionally, independent pricing vendors and/or third party broker-dealers may publish a price for the notes, which may also be reflected on customer account statements. This price may be different (higher or lower) than the price of the notes, if any, at which JPMS may be willing to purchase your notes in the secondary market.

Under the Reference Currency Return formula, any appreciation of a Reference Currency relative to the Japanese yen will be diminished, as compared to a conversion return, while any depreciation of a Reference Currency relative to the Japanese yen will be magnified, as compared to a conversion return. The diminishing effect on any appreciation of a Reference Currency relative to the Japanese yen, which we refer to as an embedded variable decelerating upside leverage, increases as the Reference Currency Return increases. The magnifying effect on any depreciation of a Reference Currency relative to the Japanese yen, which we refer to as an embedded variable downside leverage, increases as the Reference Currency Return decreases. Accordingly, your payment at maturity may be less than if you had invested in similar notes that reflected conversion returns. See “How Does the Reference Currency Return Formula Work?” in this pricing supplement for more information.

Reference Currencies individually, a combination of Reference Currencies or contracts related to the Reference Currencies for which there is an active secondary market.

Of particular importance to potential currency exchange risk are:

All of these factors are, in turn, sensitive to the monetary, fiscal and trade policies pursued by the Reference Currency Countries, Japan and the United States, and those of other countries important to international trade and finance.

relative to the Japanese yen (or the value of the Reference Currencies relative to the U.S. dollar and the value of the U.S. dollar relative to the Japanese yen). Further interventions, other government actions or suspensions of actions, as well as other changes in government economic policy or other financial or economic events affecting the currency markets, may cause currency exchange rates to fluctuate sharply in the future, which could have a material adverse effect on the value of the notes and your return on your investment in the notes at maturity.

Historical Information

The graph below shows the weekly performance of the Basket from January 6, 2012 through July 14, 2017, assuming that the Basket Closing Level on January 6, 2012 was 100 and that the exchange rates (as described below) of each Reference Currency relative to the Japanese yen on the relevant dates were the Spot Rates on such dates. The exchange rates and the historical weekly Basket performance data in this graph were determined using the rates reported by the Bloomberg Professional ^® service (“Bloomberg”) and may not be indicative of the Basket performance using the Spot Rates of the Reference Currencies relative to the Japanese yen that would be derived from the applicable Reuters pages.

The two graphs below show the historical weekly performance of each Reference Currency relative to the Japanese yen, expressed in terms of the conventional market quotation ( i.e. , the amount of Japanese yen that can be exchanged for one unit of the applicable Reference Currency, which we refer to in this pricing supplement as the exchange rate) as shown on Bloomberg, from January 6, 2012 through July 14, 2017. The following table sets forth for each Reference Currency relative to the Japanese yen (a) the exchange rates, based on data from Bloomberg, and (b) the Spot Rates, calculated in the manner set forth under “Additional Key Terms — Spot Rates” on page PS-2 of this pricing supplement on July 20, 2017.

The exchange rates above and displayed in the graphs below are for illustrative purposes only and do not form part of the calculation of the Reference Currency Returns. The value of the Basket, and thus the Basket Return, increases when the individual Reference Currencies appreciate in value against the Japanese yen.

We obtained the data needed to construct the graph that displays the weekly performance of the Basket and the Reference Currencies from Bloomberg, without independent verification, and we obtained the exchange rates used to calculate the Spot Rates from Reuters Group PLC, without independent verification. The historical performance of each Reference Currency relative to the Japanese yen and the Basket should not be taken as indications of future performance, and no assurance can be given as to the Spot Rate of any of the Reference Currencies on the Pricing Date or any Ending Averaging Date. There can be no assurance that the performance of the Basket will result in the return of any of your principal amount.

The Estimated Value of the Notes

The estimated value of the notes set forth on the cover of this pricing supplement is equal to the sum of the values of the following hypothetical components: (1) a fixed-income debt component with the same maturity as the notes, valued using the internal funding rate described below, and (2) the derivative or derivatives underlying the economic terms of the notes. The estimated value of the notes does not represent a minimum price at which JPMS would be willing to buy your notes in any secondary market (if any exists) at any time. The internal funding rate used in the determination of the estimated value of the notes is based on, among other things, our and our affiliates’ view of the funding value of the notes as well as the higher issuance, operational and ongoing liability management costs of the notes in comparison to those costs for the conventional fixed-rate debt of JPMorgan Chase & Co. For additional information, see “Selected Risk Considerations — The Estimated Value of the Notes Is Derived by Reference to an Internal Funding Rate” in this pricing supplement. The value of the derivative or derivatives underlying the economic terms of the notes is derived from internal pricing models of our affiliates. These models are dependent on inputs such as the traded market prices of comparable derivative instruments and on various other inputs, some of which are market-observable, and which can include volatility, interest rates and other factors, as well as assumptions about future market events and/or environments. Accordingly, the estimated value of the notes is determined when the terms of the notes are set based on market conditions and other relevant factors and assumptions existing at that time. See “Selected Risk Considerations — The Estimated Value of the Notes Does Not Represent Future Values of the Notes and May Differ from Others’ Estimates” in this pricing supplement.

The estimated value of the notes will be lower than the original issue price of the notes because costs associated with selling, structuring and hedging the notes are included in the original issue price of the notes. These costs include the selling commissions paid to JPMS and other affiliated or unaffiliated dealers, the projected profits, if any, that our affiliates expect to realize for assuming risks inherent in hedging our obligations under the notes and the estimated cost of hedging our obligations under the notes. Because hedging our obligations entails risk and may be influenced by market forces beyond our control, this hedging may result in a profit that is more or less than expected, or it may result in a loss. We or one or more of our affiliates will retain any profits realized in hedging our obligations under the notes. See “Selected Risk Considerations — The Estimated Value of the Notes Will Be Lower Than the Original Issue Price (Price to Public) of the Notes” in this pricing supplement.

Secondary Market Prices of the Notes

For information about factors that will impact any secondary market prices of the notes, see “Selected Risk Considerations — Secondary Market Prices of the Notes Will Be Impacted by Many Economic and Market Factors” in this pricing supplement. In addition, we generally expect that some of the costs included in the original issue price of the notes will be partially paid back to you in connection with any repurchases of your notes by JPMS in an amount that will decline to zero over an initial predetermined period that is intended to be the shorter of six months and one-half of the stated term of the notes. The length of any such initial period reflects the structure of the notes, whether our affiliates expect to earn a profit in connection with our hedging activities, the estimated costs of hedging the notes and when these costs are incurred, as determined by our affiliates. See “Selected Risk Considerations — The Value of the Notes as

Published by JPMS (and Which May Be Reflected on Customer Account Statements) May Be Higher Than the Then-Current Estimated Value of the Notes for a Limited Time Period.”