Foundations of financial markets and institutions / by Frank J. Fabozzi...[et al]

In the preface to the first edition published in 1994, we wrote that the prior 30 years had 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 finan cial landscape continues to undergo large and visible changes around the globe. The disci pline that we know as finance has attracted the talents and energies of people from Chicago ngapore and from Paris to Bombay. to Singapore
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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 radi cal 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 secu ritized 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 securiti don 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 inst tutions. 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 securi ties, 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 in global finance. Though the popular press often criticizes and misrepresents these instruments, deriv atives 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 effi cient 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.