A practical guide to the inside language of the world of derivative instruments and risk management Financial engineering is where technology and quantitative analysis meet on Wall Street to solve risk problems and find investment opportunities. It evolved out of options pricing, and, at this time, is primarily focused on derivatives since they are the most difficult instruments to price and are also the riskiest. Not only is financial engineering a relatively new field, but by its nature, it continues to grow and develop. This unique dictionary explains and clarifies for financial professionals the important terms, concepts, and sometimes arcane language of this increasingly influential world of high finance and potentially high profits. John F. Marshall (New York, NY) is a Managing Partner of Marshall, Tucker & Associates, a New York-based financial engineering and consulting firm. Former Executive Director of then International Association of Financial Engineers, Marshall is the author of several books, including Understanding Swaps.
About the Author
John F. Marshall, Ph.D., is a principal of Marshall, Tucker & Associates, LLC, a New York-based financial engineering and derivatives consulting firm. Marshall was the founding executive director and a former board member of both the International Association of Financial Engineers and the Fischer Black Memorial Foundation. He is currently a member of the board of the International Securities Exchange. Marshall is the author of more than sixteen books on financial products and markets and the author of dozens of professional articles.
Read an Excerpt
In November 1993, I accepted an invitation from John Wiley & Sons to serve as the Series Editor for the Wiley Series in Financial Engineering. As we envisioned it at the time, this book series would grow to cover the full range of topics encompassed by the rapidly evolving field of financial engineering. As the Series grew, with several new titles added each year, it became obvious that the series needed a dictionary that would provide short definitions of the many terms used by financial engineers so that users of the series, and others, could get a quick sense of their meaning. Financial engineering terms often have meanings very different from the way they are used by other branches of finance and the outside world.
Unfortunately, try as I might, I was unable to recruit authors to compile such a dictionary. Eventually, I decided that my staff and I would, in our spare time, compile it from the books that were already included in the series, augmented with terms from my earlier publications and various other public sources. We took on this task in April 1997 and thought we would have it done within two years. Of course, when you try to do anything in your spare time, it almost certainly won't get done. Not surprisingly, we slipped further and further behind our target date for completion. This was complicated further by the fact that, with every new book in the series, a list of additional terms had to be worked into the dictionary. Eventually, we decided to make completion of the dictionary a priority project and focus almost exclusively on it for several months. At the same time, we recognized that the dictionary would never be truly complete because the language, like the profession, of financial engineering continues to evolve.
With that background, let me tell you what this dictionary is and what it is not. It is an attempt to gather several thousand terms that are used by financial engineers and others involved in finance and to provide a short definition of each. When terms have multiple meanings, many of the meanings are listed. For example, if there are multiple meanings for a term, they will be separated by numbers (1), (2), etc. Each number refers to an alternative usage of the term. Very frequently, many terms mean the same thing and in many situations one term is a special case of another. We have tried to cross-reference these so that the user can make the connections. We have also included many acronyms with their meanings.
This book is not meant to be encyclopedic. That is, we do not provide a long or detailed explanation for each term. The reader should refer to the books in the series, or other sources, if greater detail is required. This book is also not intended to provide legal guidance with respect to the usage of any term contained within it.
Because of the limited scope of this work, we cannot guarantee the accuracy of any given term, nor that the term does not have meanings other than those included. The book is also not complete and never could be for the reasons noted above. For this reason, we see it as an ongoing work in progress. We would appreciate it if readers would forward via e-mail any terms they think should be included in future editions of this dictionary together with a citation of the source. We would also appreciate any suggestions for improvements of the definitions and descriptions that have already been included.
Financial engineering makes extensive use of derivative financial instruments and, not surprisingly, many of the books in the series are concerned with derivatives. Additionally, financial engineering makes extensive use of fixed income analytics, including yields, spot rates, and forward rates. For the benefit of the uninitiated, this dictionary includes some tutorial material on financial engineering, derivatives, and fixed income analytics. The tutorial material dealing with financial engineering and derivatives is drawn from a series of articles I authored (with Kevin Wynne) between 1995 and 1998 for Derivatives: Tax, Regulation, Finance (published by Warren, Gorham & Lamont). The tutorial material dealing with fixed income analytics comes from an article I authored (with Alan Tucker) for Derivatives Risk Management Services (published by Warren, Gorham & Lamont). They follow the dictionary.
I would like to thank all of my staff, particularly Mary Freeman, for the time spent digging through reference material for terms I missed. I would also like to thank the editors at John Wiley & Sons, particularly Pamela van Giessen and Claudio Campuzano, for their remarkable patience with me.
John F. Marshall, Ph. D.
marshall@ mtaglobal. com