Foundations of Financial Markets and Institutions

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9780133289800: Foundations of Financial Markets and Institutions

This book offers a comprehensive exploration of the revolutionary developments occurring in the world's financial markets and institutions —i.e., innovation, globalization, and deregulation —with a focus on the actual practices of financial institutions, investors, and financial instruments. KEY TOPICS: Extensive coverage of the markets for derivative securities. Coverage of Depository Institutions is included. For professionals in the field of financial markets.

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About the Author:

Frank J. Fabozzi is an Adjunct Professor of Finance at the School of Management at Yale University arid editor of the Journal of Portfolio Management. From 1986 to 1992, he was a full-time member of the Finance faculty at the Sloan School of Management at MIT. Dr. Fabozzi has authored and edited several widely acclaimed books in finance. He is on the board of directors of the B1ackRock complex of closed-end funds and the Guardian Park Avenue Portfolio family of open-end funds. He earned a doctorate in economics in 19'72 from The Graduate Center of the City University of New York and is a Chartered Financial Analyst. In 1994, he was awarded an honorary doctorate of Humane Letters from NOVA Southeastern University.

Franco Modigliani is Institute Professor and Professor of Finance and Economics at MIT He is an Honorary President of the International Economic Association and a former President of the American Economic Association, the American Finance Association, and the Econometric Society. He is a member of several academies, including the National Academy of Science. Professor Modigliani has authored numerous books and articles in economics and finance. In October 1985, he was awarded the Alfred Nobel Memorial Prize in Economic Sciences. He has served as a consultant to the Federal Reserve System, the U.S. Treasury Department, and a number of European banks, as well as to many businesses, and is on several boards of directors. Professor Modigliani received a Doctor of Jurisprudence in 1939 from the University of Rome and a Doctor of Social Science in 1944 from the New School for Social Research, as well as several honorary degrees.

Frank J. Jones is Executive Vice President & Chief Investment Officer of The Guardian Life Insurance Company and President of The Park Avenue Portfolio, Guardian's family of mutual funds. He is also on the board of directors of Guardian Baille Gifford Limited and the International Securities Exchange. He is on the editorial boards of the Journal of Portfolio Management and the Financial Analysts Journal. He received a doctorate from Stanford University and an M.S. in nuclear engineering from Cornell University. Dr. Jones has been on the Graduate Faculty of Economics at the University of Notre Dame, an associate professor at the San Jose State University College of Business, a lecturer at the Yale University School of Management, and an Adjunct Professor of Finance at New York University. Dr. Jones has been Director of Global Fixed Income Research and Economics at Merrill Lynch & Co. and Senior Vice President at the New York Stock Exchange.

Michael G. Ferri is a Professor of Finance at George Mason University in Fairfax, Virginia, and holds the GMU Foundation Chair in Finance. He received his doctorate in economics from the University of North Carolina in 19'75. His numerous articles on financial markets and investments have appeared in a variety of financial and economic journals. He is on the editorial advisory board of the, Journal of Portfolio Management and several academic journals. He has been a vice-president of the Financial Management Association International and has served as a consultant to agencies of the U.S. government and to several major financial institutions. In 1997, Dr. Ferri held the Coenen Visiting Professorship in the Darden School of the University of Virginia.

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PURPOSE AND STRUCTURE OF TEXT

In the preface to the first edition published in 1994, we wrote that the prior 30 years 'glad been a time of profound, indeed revolutionary, change in the financial markets and institutions of the world. The hallmarks of that change were innovation, globalization, and deregulation. Since 1994, those forces have actually gathered more strength, and the financial landscape continues to undergo large and visible changes around the globe. The discipline that we know as finance has attracted the talents and energies of people from Chicago to Singapore and from Paris to Bombay.

Our purpose in writing this book is to instruct students about this fascinating revolution. We describe the wide array of financial securities that are now available for investing, funding operations, and controlling various types of financial risk. We help the students to see each kind of security as a response to the needs of borrowers, lenders, and investors, who manage assets and liabilities in a world of constantly changing interest rates, asset prices, regulatory constraints, and international competition and opportunities. Our book devotes a considerable amount of space to explaining how the world's key financial institutions manage their assets and liabilities and how innovative instruments support that management. Also, the text gives students a thorough introduction to financial regulation and to major facets of international finance.

It is a safe bet that change will mark the discipline of finance over the foreseeable future and will produce new kinds of institutions, markets, and securities. Our extensive explanation of the developments that dominate today's financial scene provides students with the sense of institutional structure and the analytical tools that they will need to understand the innovations that will surely occur throughout their careers.

Our coverage of institutions, investors, and instruments is as current and up-to-date as we can produce in the face of frequent and significant change both in the United States and around the world. We have made a major effort to get the latest information and data on the players in the global financial game and the rules by which it is played. We think our focus on the actual practices of financial institutions is particularly beneficial to students who will, as noted above, inevitably have to respond to changes in those institutions and their environment.

We believe that our book differs in several key respects from many texts on financial institutions and markets. What follows is an outline of the key differences.

The first difference, and a special feature of this text, is its lengthy coverage of the securitization of assets and the large mortgage market (both residential and commercial). Securitization is the process by which a security, whose collateral is the cash flow from a pool of individually illiquid and often small assets, is created and sold-in the capital markets. Asset securitization has been a major innovation of the past 20 years and represents a radical departure from the traditional system for financing needs by manufacturing companies, finance companies, and governments throughout the world. The mortgage-backed security is the prime example of this process and accounts for the largest part of the market for securitized assets. However, the issuance of securitized pools of credit card debt, auto loans, other consumer liabilities, and receivables from intellectual property is becoming a very important part of international financial markets. The text devotes a considerable amount of time to securitized assets and their markets and offers chapters on mortgage loan securitization as well as the securitization of other assets.

The second difference is our commitment to giving the students a substantial amount of information and analysis regarding international or global topics in finance. Our discussions range across a wide field, encompassing markets for bonds and stocks as well as mutual funds in Tokyo, London, Frankfurt, and Paris, among other places. The text gives some detailed explanations about the operations, structure, and regulation of these major markets and institutions. Just a glance at the table of contents shows that this book covers many international topics, which today's students must know in order to function in the increasingly integrated international financial system where they will soon be working.

The third difference is the book's extensive coverage of the markets for derivative, securities, such as options, futures, swaps, customized agreements for controlling interest rate risk, and so on. These derivative securities and their markets grow ever more important m global finance. Though the popular press often criticizes and misrepresents these instruments, derivatives enable financial practitioners to control risk and the cost of funding. Because of these instruments, financial markets in the United States and throughout the world are more efficient and can contribute more to economic development and growth.

Our discussion of options naturally contains an explanation of the theoretical principles of pricing. We often show that option pricing theory also applies to complex securities that have embedded options. For example, many kinds of bonds contain optionlike provisions: Issuers may exercise some, and holders may exercise others. Students need to understand options and pricing theory if they are to grasp the valuation of many of today's important assets. Although the text does not delve deeply into trading strategies, it does contain a great deal of information on these contracts and is suitable as a supplementary text for a course dealing with derivatives.

PLANNING AND MANAGING A COURSE

We do not believe that an instructor has the time in a single semester to treat all the topics covered by this book. The following table contains our suggestions for the chapters that should be included in a one-semester course on financial markets and institutions. The table also identifies those chapters that render the text a useful supplement for a course in investments or one in derivative securities.

CHANGES FROM THE SECOND EDITION

We have changed the text in several ways. First, we have updated all discussions of financial institutions in the United States and around the world, and we have revised the tables and charts, using the most current information and numbers we could find. Second, we have substantially revised the following chapters: 7 (Insurance Companies), 8 (Investment Companies and Exchange Traded Funds), 9 (Pension Funds), 18 (Common Stock Markets), 19 (Stock Markets Around the Worlds), and 25 (Asset-Backed Securities Markets).

To help us in updating the book, we recruited another coauthor, Dr. Frank J. Jones, chief investment officer of The Guardian Life Insurance Company of America. His experiences in asset management, as well as his many experiences in the development of financial products prior to joining, provide significant insights.

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