Although the basic purposes of finance, and the nature of the core instruments used in
attaining them, are relatively constant, recent years have seen an explosion in complexity of
both products and techniques.
A number of forces are driving this explosion. The first is internationalization encompassing
a dramatic growth in the number of countries with stock markets, convertible currencies and
a positive regime for foreign investors. For a number of years the more adventurous
institutional and private investors have been increasing the proportion of their investments in
foreign markets in general and emerging markets in particular in search of growth, higher
returns and better diversification. Reflecting this, finance has begun the long process of
overhauling the traditionally domestic measurement of risk and return. In the new world
order in which the next generation is likely to see an unprecedented transfer of economic
power and influence from slow growing developed economies to the high growth tigers in
Asia and the Pacific Rim, the ability of financial markets to recognize and accommodate the
changes will be a priority.
The second change has come from dramatic falls in the costs of both information and
transaction processing. More information is available and it is available more quickly in more
places. Improved databases allow sophisticated analysis that would have been impossible a
few years ago and data intensive artificial intelligence techniques allow a much richer array
of market structures to be considered. The switch to electronic systems of transactions and
trading has dramatically lowered costs, allowing increased arbitrage and stimulating the
widespread use of complex new derivative products and products offering potentially an
infinity of combinations of underlying products. It is no exaggeration to claim that these new
techniques and instruments can be used to provide a proxy for any underlying traded
instrument.
This power is increasingly used in the marketplace to provide the financial community with
new choices, including performance guarantees and indexed products. The development of
traded instruments provides an ability to pinpoint exposures precisely and this has lead to a
new science of risk management, where the net exposures of a portfolio of risky assets such
as securities or bank loans can be estimated and, where required, selectively or completely
hedged by buying opposite exposures in the marketplace. Not surprisingly, this encyclopedic
dictionary reflects these new techniques which are inexorably creating a world in which
financial assets are priced in a seamless global marketplace.
New technology has helped in selecting entries for the dictionary. A word count of titles in
finance and business journals was used to identify the frequency with which particular terms
appeared and this was used as a primary guide to the priority and length of entries. To
accommodate new topics such as real options that are only just emerging into the literature,
we also included some entries where interest was growing rapidly towards the end of the
search period.