Technical terms are italicized when first introduced and defined at the end of the chapter.
“Markets” refers to both capital and money markets, while “intermediaries” refers to financial institutions that raise funds for the purposes of relending or reinvesting them. “Internally provided financing” refers to financing provided by one part of a business organization to finance activity in another part. All three terms are more fully defined in Chapter 3.
Financial engineers like to emphasize the differences between instruments used for risk management. However, for explanatory purposes it is more important to recognize the instruments’ similarities.
A risky financial deal is one whose earnings cannot be determined exactly in advance. Rather, they are known only in terms of a probability distribution.
Financiers may exhibit these preferences even after adjusting returns for differences in risk. Chapters 15 and 16 show how specialized financial intermediaries can play important roles in assessing particular deals.
“Neoclassical economics” refers to the formal economic analysis discussed in many economics textbooks. It is characterized by assumptions of individual rationality, homogeneously distributed information, absence of transactions costs, and focuses heavily on the kinds of equilibria attained under these assumptions.
Similarly, worldwide mergers of stock and derivatives exchanges are partly being driven by the economics of integrating clearing and settlement ...