Frank J. Fabozzi - Foundations of Global Financial Markets and Institutions (The MIT Press)

Foundations of Global Financial Markets and Institutions

Fifth Edition

Frank J. Fabozzi and Frank J. Jones

With Francesco A. Fabozzi and Steven V. Mann

The MIT Press

Cambridge, Massachusetts

London, England

2019 Massachusetts Institute of Technology

All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher.

This book was set in Times Roman by Westchester Publishing Services. Printed and bound in the United States of America.

Library of Congress Cataloging-in-Publication Data

Names: Fabozzi, Frank J., author. | Jones, Frank Joseph, author.

Title: Foundations of global financial markets and institutions / Frank J. Fabozzi and Frank J. Jones ; with Francesco A. Fabozzi and Steven V. Mann.

Other titles: Foundations of financial markets and institutions

Description: Fifth edition. | Cambridge, MA : MIT Press, [2019] | Earlier editions published as: Foundations of financial markets and institutions. | Includes bibliographical references and index.

Identifiers: LCCN 2018026996 | ISBN 9780262039543 (hardcover : alk. paper)

Subjects: LCSH: Finance. | Financial institutions.

Classification: LCC HG173 .F29 2019 | DDC 332.1dc22

LC record available at https://lccn.loc.gov/2018026996

To the memory of my sister, Lucy Fabozzi.

FJF

To my wife, Sally.

FJJ

Contents

List of Figures

Classification of global financial markets.

Insurance/savings/retirement vehicles.

Negative (top panel) and positive (bottom panel) skewed probability distributions.

Normal (Gaussian) probability distribution; denotes the standard deviation.

Difference between a standard normal distribution and a distribution with high excess kurtosis.

S&P 500 monthly returns plotted against a normal distribution: (a) S&P 500 monthly returns from 1970 to 2015; (b) S&P 500 monthly returns from 1980 to 2015; (c) S&P 500 monthly returns from 1990 to 2015.

DAX returns plotted against a normal distribution, 19912015: (a) DAX monthly returns; (b) DAX daily returns.

Nikkei 225 returns plotted against a normal distribution, 19902015: (a) Nikkei 225 monthly returns; (b) Nikkei 225 daily returns.

FTSE 100 returns plotted against a normal distribution, 19902015: (a) FTSE 100 monthly returns; (b) FTSE 100 daily returns.

Illustration of the value-at-risk (VaR) measure.

Feasible and efficient portfolios for assets 1 and 2.

Feasible and efficient portfolios with more than two assets.

Selection of the optimal portfolio.

Selection of the optimal portfolio with different indifference curves (utility function).

The capital market line.

Systematic and unsystematic portfolio risk.

Graphical depiction of the market model.

The security market line.

Indifference curve between current and future consumption.

Representation of opportunity locus in the loan market (the market line).

Family of indifference curves and the market line.

Supply curve for loans.

Opportunity locus from investment (transformation curve or production function).

Measuring the profit from investing.

Profit maximization point.

Profit maximization and the cost line.

Transformation curve imposed on current and future consumption graph.

Measuring investment and profit from investment.

Optimal investment and borrowing decisions.

Market equilibrium.

Change in I, S, and R if investment function increases.

Change in I, S, and R if saving function increases.

Equilibrium in Keyness market for money.

Three hypothetical yield curves.

Two alternative one-year investments.

Structure of U.S. stock markets.

U.S. equity trading venues.

The Chinese stock market and exchanges: (a): structure of the Chinese stock market; (b) Chinese stock exchanges; (c) Chinese stock indexes.

Creation of a mortgage pass-through security.

Graphical depiction of 100 PSA.

Subordination (credit support), priority of payment, and order of loss allocation for Banc of America Commercial Mortgage Trust 2006-1.

Profit/loss profile for a long call position.

Profit/loss profile for a short call position.

Profit/loss profile for a long put position.

Profit/loss profile for a short put position.

One-period option pricing model.

One-period option pricing model illustration.

Interest rate swap for debt issuance.

Outcome of two alternatives: determination of theoretical forward rate.

A currency swap example.

Categorization of credit derivatives.

Mechanics of a single-name credit default swap with physical delivery.

Mechanics of a credit default swap index with physical delivery.

List of Tables

Summary of classification of financial markets.

U.S. Government bailouts by type.

Nature of liabilities of financial institutions.

Summary of corporate bond ratings systems investment grade: high creditworthiness.

A hypothetical average one-year rating migration table.

Elements of CAMELS bank ratings.

The 19 central banks of the member countries of the G20.

Some basic differences in banking systems around the world.

Bank supervisory criteria for assessing systemic risk.

Largest life insurers in the United States, Europe, and Asia.

Classification of cash value insurance.

Price of a four-year bond for various discount rates.

Price of a bond paying $50 annually and $1,000 at maturity for various discount rates and maturities.

Price decline if the discount rate increases 100 basis points for a bond paying $50 annually and $1,000 at maturity for various discount rates and maturities.

Determination of duration for a 5% coupon bond with a principal of $1,000 and an initial required yield of 9%.

Duration for various bonds by maturity, coupon rate, and yield level.

Portfolio expected returns and standard deviations for five asset allocations for assets 1 and 2.

Beta estimates for five stocks on August 3, 2018, from Yahoo Finance.

Maturity and yield to maturity for 20 hypothetical Treasury securities.

Theoretical spot rates.

Illustration of how to value a 10-year, 10% Treasury bond using spot rates.

U.S. Treasury yield curve for five dates.

Illustration of an auction for an IPO.

ISO 4217 currency codes for selected countries.

2016 Currency distribution of global FX market turnover, top eight currencies.

2016 top eight global FX market turnover by currency pair: Daily averages.

Central government debt securities outstanding in Billions of U.S. Dollars as of year end, 2016.

Maturities of short-term debt for selected countries.

Maturities for coupon debt securities 230 years and availability of stripping, selected countries.

Comparison between a traditional bond and an inflation-adjusted bond.

Price auction illustration.

Total payments of a 2% gilt to be stripped.

Trading stock markets: Then and now.

Quote-driven/dealer market.

Stock weights by index weighting methodshypothetical data.

Stock index weighting methodsactual data.

Conditional orders and the direction of triggering security price movements.

Country composition of the FTSE Global All Cap Index, April 30, 2017.

Global stock indexes.

Twenty largest global stock exchanges by market capitalization, January 31, 2015.

The Chinese Stock Exchanges (as of January 31, 2015).