g.,
receives principal payments. These
check clearing, electronic funds trans-
principal payments pay down the prin-
fers, etc.), regulating the use of margin
cipal balance of the tranche. Once fully
in securities transactions, managing li-
paid down, the tranche is retired and
quidity, and, on occasion, interacting in
the principal flows are redirected to the
the foreign exchange markets to ma-
next tranche. For this reason, whichever
nipulate the value of currencies.
tranche is currently receiving principal
is the fastest-pay tranche. See also col-
FHLMC See Federal Home Loan Mortgage
lateralized mortgage obligation.
Corporation.
FCM See futures commission merchant.
fiduciary A person responsible for in-
vesting his or her company’s money or
Fed A reference to the Federal Reserve
the money of others. Fiduciaries have a
System.
duty to act exclusively for the benefit of
those they represent.
Federal Home Loan Mortgage Corpora-
tion Usually abbreviated FHLMC. One
fiduciary obligation An obligation to act
of several federally sponsored corpora-
in the best interest of another.
tions that sell securities backed by pools
of mortgages. The FHLMC guarantees
the ultimate payment of principal and
final settlement The date on which cash-
the timely payment of interest on its
settled futures are marked-to-market
mortgage passthrough certificates.
using the spot price of the underlying
Known by its nickname Freddie Mac .
as the final settlement price. On this
date, the contracts cease to exist. This is
Federal National Mortgage Associa-
in contrast to the daily mark-to-market,
tion Usually abbreviated FNMA. One
which is based on the settlement price
of several federally sponsored corpora-
of the futures contract for the day.
tions that sell securities backed by pools
of mortgages. The FNMA guarantees
Financial Accounting Standards Board
the timely payment of interest and
Known by the acronym FASB. An inde-
principal on its mortgage passthrough
pendent body recognized by both the
certificates. Presently owned entirely
SEC and Congress as having an au-
by private stockholders. Known by its
thoritative role in setting accounting
nickname Fannie Mae .
standards in the United States. The
FASB periodically issues statements of
Federal Reserve An entity created by
guidance on accounting matters called
the Federal Reserve Act of 1913 to make
Financial Accounting Statements (FAS).
monetary policy. The Federal Reserve,
These statements form a large part of
known by its nickname the Fed, is over-
what are known as generally accepted
seen by a seven-member Board of Gov-
accounting principles (GAAP).
Marshall_001_108 9/27/00 7:29 AM Page 79
financial engineering–Fisher Equation
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79
financial engineering The use of finan-
sic balance sheet view of an intermedi-
cial instruments, such as derivatives, to
ary is somewhat obscured. In this case,
obtain a desired mix of risk and return
a dealer, such as a swap dealer, may be
characteristics. More broadly, the ap-
seen as intermediating between two
plication of financial technology to
end users.
solve financial problems and exploit fi-
nancial opportunities. Sometimes used
Financial Services Act of 1999 This leg-
more narrowly to mean financial risk
islation was passed by Congress to ex-
management. The essential feature of
plicitly repeal many provisions of the
financial engineering is that it uses in-
Glass-Steagall Act (i.e., the Banking Act
novation and financial technology to
of 1933). Since the early 1980s, the pro-
engineer structures (including solu-
visions of the Glass-Steagall Act had
tions to problems).
been eroding as the Federal Reserve
and other regulatory bodies chipped
financial engineers Persons who engage
away at its many restrictions. The Fi-
in financial engineering activities as
nancial Services Act of 1999 finally
their principal occupation. Sometimes
enacted into law what was happening
defined more narrowly as those who
around the edges anyway.
engage in structured product origina-
tion activities. Often taken to include
finite difference method A method of
financial economists (including aca-
solving a finite difference equation that
demicians) who contribute to the de-
has applicability in solving for the
velopment of financial engineering
value of certain derivative contracts,
technology (i.e., valuation methodolo-
particularly options.
gies, risk management methodologies,
basic research, etc.).
firm commitment A type of underwrit-
ing commitment in which the under-
financial futures
Futures contracts
writing syndicate guarantees an issuer
written on financial instruments or fi-
that all of its securities will be sold and
nancial indexes of any sort. This is in
that the issuer will receive the full
contrast to futures written on com-
amount of the proceeds to the issuer as-
modities. Financial futures include cur-
sociated with the sale of the securities
rency futures, stock index futures, and
at the offering price, less the gross
various types of interest rate futures.
spread. In such an underwriting, the
underwriting syndicate bears the risk
financial intermediary A financial insti-
of a failed offering. For contrast, see best
tution that stands between two end
efforts.
users of the intermediary’s products. In
the traditional context, one user is rep-
fiscal agent An entity, usually a com-
resented on the asset side and the other
mercial bank or investment bank, that
is represented on the liabilities side of
has been designated by the government
the intermediary’s balance sheet. For
to act for it or for one of its agencies in
example, a bank that takes deposits
any of a variety of financial transactions
from investors (liabilities side of the
including the sale of federal agency se-
bank’s balance sheet) and then lends
curities. The Federal Reserve Bank of
them in the bank’s name to borrowers
New York acts as the fiscal agent in the
(asset side of the bank’s balance sheet)
sale of Treasury securities.
would constitute a financial intermedi-
ary. In the context of swaps and other
Fisher Equation An equation that re-
off–balance sheet derivatives, the clas-
lates nominal rates of interest to re-