Dictionary of Financial Engineering (Wiley Series in Financial Engineering)

303 Pages·2000·1.33 MB·English

by  John F. Marshall

B u s i n e s s C u l i n a r y A r c h i t e c t u r e
C o m p u t e r G e n e r a l I n t e r e s t
C h i l d r e n L i f e S c i e n c e s B i o g r a p h y
A c c o u n t i n g F i n a n c e M a t h e m a t i c s
H i s t o r y S e l f - I m p r o v e m e n t H e a l t h
E n g i n e e r i n g G r a p h i c D e s i g n
A p p l i e d S c i e n c e s P s y c h o l o g y
I n t e r i o r D e s i g n B i o l o g y C h e m i s t r y
e
WILEY
B O O K
WILEY
JOSSEY-BASS
PFEIFFER
J.K.LASSER
CAPSTONE
WILEY-LISS
WILEY-VCH
WILEY-INTERSCIENCE
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D
ictionary of
Financial
Engineering
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Wiley Series in Financial Engineering
Derivatives Demystified: Using Structured Financial Products
John C.Braddock
Option Pricing Models
Les Clewlow and Chris Strickland
Derivatives for Decision Makers: Strategic Management Issues
George Crawford and Bidyut Sen
Currency Derivatives: Pricing Theory,Exotic Options,and
Hedging Applications
David F.DeRosa
Options on Foreign Exchange,Second Edition
David DeRosa
The Handbook of Equity Derivatives,Revised Edition
Jack Francis,William Toy,and J.Gregg Whittaker
Dictionary of Financial Engineering
John F.Marshall
Interest-Rate Option Models: Understanding,Analyzing,and
Using Models for Exotic Interest-Rate Options
Ricardo Rebonato
Derivatives Handbook: Risk Management and Control
Robert J.Schwartz and Clifford W.Smith,Jr.
Dynamic Hedging: Managing Vanilla and Exotic Options
Nassim Taleb
Credit Derivatives: A Guide to Instruments and Applications:
Janet Tavakoli
Pricing Financial Instruments: The Finite Difference Method
Domingo Tavella and Curt Randall
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D
ictionary of
Financial
Engineering
John F. Marshall, Ph.D.
Marshall,Tucker & Associates,LLC
John Wiley & Sons
New York (cid:2) Chichester (cid:2) Weinheim
Brisbane (cid:2) Singapore (cid:2) Toronto
Copyright © 2000 by John F. Marshall, Ph.D. All rights reserved.
Published by John Wiley & Sons, Inc.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system,
or transmitted in any form or by any means, electronic, mechanical, photo-
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This publication is designed to provide accurate and authoritative informa-
tion in regard to the subject matter covered. It is sold with the understand-
ing that the publisher is not engaged in rendering professional services. If
professional advice or other expert assistance is required, the
services of a competent professional person should be sought.
Library of Congress Cataloging-in-Publication Data:
Marshall, John F. (John Francis), 1952–
Dictionary of financial engineering / John F. Marshall.
p. cm. — (Wiley series in financial engineering)
ISBN 0-471-24291-8 (cloth : alk. paper)
1. Financial engineering—Dictionaries. I. Title. II. Series.
HG176.7 .M368 2000
658.15—dc21 00-043326
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
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To all my students—past, present, and future.
Jack
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A BOUT THE AUTHOR
John F. Marshall is Professor of Finance at St. John’s University and Director of
the University’s Center for Financial Engineering. Dr. Marshall is also a prin-
cipal of Marshall, Tucker & Associates, LLC, a financial engineering and
derivatives consulting firm with offices in New York, Chicago, Boston, San
Francisco, and Philadelphia; and he is a member of the Board of Directors of
the International Securities Exchange, the first SEC-approved screen-based op-
tions exchange in the United States. Dr. Marshall is the author of sixteen books
on financial products, markets, and analytics including Futures and Option Con-
tracting (South Western), Investment Banking & Brokerage (McGraw Hill), Un-
derstanding Swaps (Wiley), and Financial Engineering: A Complete Guide to
Financial Innovation(Simon & Schuster). He has also authored several dozen ar-
ticles published in professional journals and he is a frequently requested
speaker for financial conferences.
Dr. Marshall is an accomplished financial innovator. He contributed to
the development of the mathematical underpinnings of cash/index arbitrage
using stock index futures (sometimes called program trading), and to the de-
velopment of the first published pricing models for both equity swaps and CMT
swaps. He is the originator or co-originator of seasonal swaps, synthetic barter,
and macroeconomic swaps. He also participated in the development of several
mortgage product variants.
From 1992 to 1998, Dr. Marshall served as the Executive Director of the
International Association of Financial Engineers (IAFE). During his time as its
Executive Director, the IAFE grew from 40 founding members to over 2000
members worldwide. From 1997 through 1999 he served on the Board of Di-
rectors of the Fischer Black Memorial Foundation. From 1991 to 1995, Dr. Mar-
shall served as the managing trustee for Health Care Equity Trust, a closed-end
limited-life investment company sponsored by Paine Webber.
From 1994 to 1996, Dr. Marshall served as Visiting Professor of Financial
Engineering at Polytechnic University where he created the first Master of
Science degree program in Financial Engineering under a grant from the Al-
fred P. Sloan Foundation. During 1992 he held the post of Distinguished Visit-
ing Professor of Finance at the Moscow Institute of Physics and Technology, a
unit of the Russian Academy of Sciences.
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viii (cid:2) About the Author
Dr. Marshall has been an invited lecturer at the Wharton School of Busi-
ness of the University of Pennsylvania, the Stern School of Business at New
York University, and the Graduate School of Business of the University of Chi-
cago. Outside the United States, he has lectured in Zurich, London, Toronto,
Bucharest, and Tokyo. As a consultant, Dr. Marshall has worked for the United
States Treasury Department, the United States Justice Department, the Federal
Home Loan Bank, The First Boston Corporation (now CS First Boston), the
Chase Manhattan Bank, Chemical Bank, Smith Barney (now Salomon Smith
Barney), Merrill Lynch, Goldman Sachs, Morgan Stanley Dean Witter, Paine
Webber, Union Bank of Switzerland, and JPMorgan, among others.
Dr. Marshall earned his undergraduate degree in Biology/Chemistry
from Fordham University in 1973. He earned an MBAin Finance from St. John’s
University in 1977 and an M.A. in Quantitative Economics from the State Uni-
versity of New York in 1978. He was awarded his doctoral degree in Financial
Economics from the State University of New York at Stony Brook in 1982 while
also a dissertation fellow of the Center for the Study of Futures Markets at Co-
lumbia University.
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C ONTENTS
Preface xi
Dictionary of Financial Engineering Terminology 1
Appendices 193
Abbreviations/Acronyms for Security and Futures Exchanges 195
A. Fixed Income Analytics: Forward Rates,Spot Rates, 197
and Option Adjusted Spreads
(adopted from “Option Adjusted Spread Analysis”
Derivatives Risk Management Services, Warren, Gorham,
& Lamont, pp. 4D1-4D33)
B. From Portfolio Theory to Complex Constructs: 223
Financial Engineering Comes of Age
(Derivatives: Tax, Regulation, Finance, vol 1(1), September/
October 1995, pp. 39–41)
C. What are Swaps? A Look at Plain Vanilla Varieties 227
(Derivatives: Tax, Regulation, Finance, vol 1(3),
January/February 1996, pp. 128–130)
D. Creative Engineering with Interest Rate Swaps 233
(Derivatives: Tax, Regulation, Finance, vol 1(5), May/
June 1996, pp. 233–237)
E. Currency Swaps,Commodity Swaps,and Equity Swaps 241
(Derivatives: Tax, Regulation, Finance, vol 2(1), September/
October 1996, pp. 43-48)
F. Options 101: The Basics 251
(Derivatives: Tax, Regulation, Finance, vol 2(3), January/
February 1997, pp. 147–152)
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