E-encyclopedia of banking, stock exchange and finance

Selected letter: F

  • Facebook inc.

    Facebook is a web application that connects people; Facebook's mission is to give people the power to share and make the world more open and connected. Millions of people use Facebook everyday to keep up with friends, upload an unlimited number of photos, share links and videos, and learn more about the people they meet.

    Facebook has been established by M. Zuckerberg, a Harvard student, on 4 February 2004 in the USA, and listed on the NASDAQ in May 2012. The listing price is being analysed by US authorities because of the excess volatility registered in the very few days on the NASDAQ.


    It is the feature that assumes a bet, or a lottery, in case that are known the probabilities of a random distribution of the event object of the game and in case of positive outcome, the sum received in premium is equal to the bet multiplied by the reciprocal of chances of winning. In particular, given the likelihood of the occurrence of random event (Px), the price you pay to play the game (B), is equal to the product of the award sum (s) for the probability of winning (Pv).

    On the contrary, it is not fair game when there is a fee or profit (?) of the operator of the game.


    AA.VV., Matematica Finanziaria, Monduzzi Editore, 1998

    Grinstead M. C., Snell J. L., Introduction to Probability, American Mathematical Society, 1997

    Editor: Giuliano DI TOMMASO

  • FAIR TRADE (Encyclopedia)

    Fair trade is a growing economic initiative promoted by importing organizations from Europe and the USA, whose aim is to establish long-term relationships with associations of marginalized producers in LDCs in order to promote market inclusion, poverty reduction, capacity building, and improvement of local wellbeing. It is conceived as an example of the more general phenomenon of consumers’ revealed social preferences and producers’ capacity of extracting surplus from them: ethically concerned consumers pay attention not only to prices and quality, but also the social and environmental values of the purchased goods. In this sense, the consumer's choices embody opportunities to expand sustainable development. The organisms that elaborate common strategies to support and promote FT at the international level are the ones recognized under the acronym FINE (FLO, IFAT, NEWS and EFTA).
    The FLO (Fairtrade Labelling Organizations) is an international non-profit organization founded in Germany in 1997, aiming to introduce a unique FT trademark worldwide. It established a certification mechanism to submit under verification producers, importers and other firms that take part in the production process. This mechanism guarantees that FT labelled products are in conformity with the provided criteria and that their production assures specific services (not only economically oriented) to marginalized producers. The FT criteria include: i) Transparency and business accountability; ii) Increase in capacity building; iii) An anticyclical mark-up on producers’ prices incorporating an insurance mechanism which guarantees them a minimum earning; iv) Gender equity and fair working conditions; v) Respect for the environment; vi) A direct investment in local public goods (health, education) through the contribution provided to the local producers’ associations; vii) Anticipated financing schemes; viii) Export services.
    The IFAT (International Federation of Alternative Trade) is the international organization that looks after the coordination of importers, producers’ organizations and final retailers of FT products.
    Finally, the NEWS (Network of Worldshops) and the EFTA (European Fair Trade Association) guide all FT shops all over the world.
    The scientific literature documents different possible forms of externalities induced by FT. It has been shown that the FT channel may help to address specific market failures such as credit rationing, underinvestment in local public goods (health, education, professional training), monopsony of local intermediaries and/or moneylenders (Becchetti and Rosati, 2007). Ronchi (2006) finds that FT helps affiliated coffee producers in Costa Rica to increase their market power. Becchetti and Costantino (2008) show in their study that capacity building, trade and product risk diversification are the main sources of benefit for local FT affiliated producers. Moreover, the mark-up on the intermediate price and the success of FT products have been shown to generate contagion effects on profit maximizing competitors (Becchetti and Solferino, 2008)and to convert fair trade into a source of product innovation which increases product variety. Becchetti and Michetti (2008) reveal a link between the FT channel and relational goods since the long-term trade relationship between importers and producers generates an additional social value to the economic one, in the form of membership and generalized trust. Becchetti, Castriota and Michetti (2008) present FT as a possible measure useful to reduce child labour and raise the child schooling level in Chile, by influencing parents’ decisions to send their children to school. Finally, Becchetti et al., (2007) find that affiliation has significant effects on professional self-esteem and life satisfaction.
    Three main critiques have been addressed to Fair Trade. The first suggests that the intermediate good price mark-up is a distortion with respect to the market clearing price, since, by generating excess supply, it sends wrong signals to the producers. Nevertheless, the economic answer to this point is that the anticyclical price premium may be perfectly consistent with market equilibrium in situations where local intermediaries and moneylenders have monopsony power on marginalized producers.
    Indeed, fair trade helps to reduce the dependence of affiliated farmers on other intermediaries (Becchetti and Costantino, 2008)and to increase their bargaining power (Becchetti et al., 2008). The second critique relates to the standard purchase plus charity donation scheme: if the amount is equivalent to the price differential between the fair trade and the traditional product, it is welfare enhancing with respect to the fair trade choice (LeClair, 2002).
    However, it is argued that it must be taken into account that charity, unlike the "portfolio vote" of FT consumers, has no local antitrust effects and does not create contagion among profit maximizing competitors of fair trade. Thirdly, it has been questioned that fair trade may produce negative effects on non-affiliated local producers (LeClair, 2002). Becchetti et al. (2007) empirically address this problem and show that the externalities on local non-affiliated producers can be both positive and negative.
    Becchetti L., Castriota S., Michetti M., (2008); Testing the luxury axiom: the effects of fair trade on child schooling decision on a sample of Chilean honey producers, Mimeo.
    Becchetti, L. Giallonardo E. Tessitore, N. (2008); Ethical product differentiation with symmetric costs of ethical distance. Rivista di Politica Economica, forth.
    Becchetti L., Costantino M. (2008); Fair Trade on marginalized producers: an impact analysis on Kenyan farmers. World Development 365: 823…842.
    Becchetti L., Michetti, M., (2008); When Fair Trade Generates Social Capital: Creating Room for Manoeuvre for Pro-Poor Policies. Ecineq working papers 88.
    Becchetti L., Solferino, N. (2008). On ethical product differentiation, Economia e Politica Industriale, (forth).
    Becchetti L., Rosati F. (2007); Globalisation and the death of distance in social preferences and inequity aversion: empirical evidence from a pilot study on fair trade consumers, The World Economy, 30 (5): 807-30.
    Becchetti L. Costantino M. Portale E., 2007, Human capital, externalities and tourism: three unexplored sides of the impact of FT affiliation on primary producers, CEIS working paper n. 262
    Leclair, M. S. (2002); Fighting the tide: Alternative trade organizations in the era of global free trade. World Development 30(7): 1099…1122.
    Ronchi, L. (2006); "Fairtrade" and Market Failures in Agricultural Commodity Markets. World Bank Policy Research Working Paper 4011. Washington: IBRD.
    Editor: Melania MICHETTI
    © 2009 ASSONEBB


    The Federal Reserve System, also known as Federal Reserve (FED), is the central bank of the United States. It was founded when president Woodrow Wilson signed the Federal Reserve Act on 23 December 1913 with the scope of providing the nation with a safer, more flexible and more stable monetary and financial system. Over the years, the FED’s role in banking and in the economy has expanded. Today its main objective is to conduct the nation’s monetary policy towards full employment, stable prices and long-term interest rate moderation.
    The FED System consists of a seven member Board of Governors with headquarters in Washington, D.C., and twelve Reserve Banks located in major cities throughout the United States, which supervise and regulate financial institutions’ activities, provide bank services to depository institutions, ensure information exchange and equal treatment of consumers within the bank system. The System also includes several private banks, which are obliged to subscribe a certain amount of resources with the FED.

    1. Organizational structure: the Board of Governors

    The Board of Governors is the federal agency of the Federal Reserve System and it collaborates with other Systems’ bodies. The primary responsibility of the Board members is the formulation of monetary policy. In addition, the Federal Reserve Board regulates and supervises all the banks that are members of the System and bank holding companies; it coordinates international operations of both member banks and foreign banks into the federal states, it manages international bank services within the country together with the system of payments, ensuring its correct functioning and development; it coordinates the juridical system related to consumer credit.
    The Board of Governors is made of seven members that are appointed by the President of the United States and confirmed by the Senate to serve a 14-year term of office. Both the Chairman and Vice-Chairman must be members of the Board or, alternatively, be appointed by the Board and serve their office for four years.
    The Board meets several times a week. Meetings are conducted in compliance with the Government in the Sunshine Act, and they usually are open to the public. However, if the Board has convened to consider confidential financial information, the sessions are closed to public observation. Furthermore, members of the Board routinely confer with officials of other government agencies, representatives of banking industry groups, officials of the central banks of other countries, members of Congress and academicians.

    2. Federal Open Market Committee (FOMC)

    The Federal Open Market Committee (FOMC) is one of the main bodies of the FED System. It is composed of the seven members of the Board of Governors and five different Reserve Bank presidents. According to tradition, the FOMC’s president and vice-president are the president of the Board of Governors and the president of the Federal Reserve Bank of New York, respectively1. The FOMC makes key decisions regarding the conduct of open market operations, being the latter the main mechanism in the hands of the FED to regulate and modify the total level of currency and credit within the system. By law, the FOMC must meet at least four times each year in Washington, D.C. and vote on the policy to be carried out during the interval between these meetings. Since 1981, eight regularly scheduled meetings have been held each year at intervals of five to eight weeks. However, if circumstances require consultation or consideration of an action between these regular meetings, members may be called on to participate in a special meeting. Given the confidential nature of the information discussed, attendance at meetings is restricted and limited to Committee members and staff officers, non-member Reserve Bank presidents, the Manager of the System Open Market Account and a small number of Board and Reserve Bank staff. Furthermore, the Board of Governors must keep a record of the actions taken by the FOMC on all questions of policy and, twice a year, submit a written report to the Congress on the state of the economy and the course of monetary policy.

    2.1 Federal Reserve Banks

    For the purpose of carrying out the FED’s daily operations, the nation has been divided into twelve Federal Reserve Districts with Banks in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco. Twenty-five Branches of these Banks serve particular areas within each District. Federal Reserve Banks are in charge of initiating changes in the discount rate and the rate of interest on loans made by Reserve Banks to depository institutions according to the so called "discount window"2. The Board of Governors must approve these changes in the discount rate.
    Figure 1 … Locations of Federal Reserve Banks and their Branches.

    Source: The Federal Reserve System: Purpose and Functions, System Publication.

    2.2 Board of Directors

    The Federal Reserve System also includes the Board of Governors, whose responsibilities were established by the Federal Reserve Act of 1913, ranging from the supervision of the Reserve Bank to making recommendations on monetary policy. In particular, each of the Reserve Banks is supervised by a board of nine directors who are familiar with economic and credit conditions in the district, while each of the twenty-five Reserve Bank Branches has a board of five or seven directors.
    Reserve Banks' boards of directors are divided into three classes … A, B and C … of three persons each. Class A directors represent the member commercial banks in the District, while class B and C directors represent consumers with due consideration to the interests of agriculture, commerce, industry, services, labour and consumers. Class A and B members are appointed by District Banks, while the Board of Governors appoints class C members.
    The Board of Directors appoints the Reserve Bank presidents and the first vice-presidents, subject to approval by the Board of Governors. Directors are in charge of reviewing their Reserve Bank's budget and expenditures and set every two weeks the discount rate paid by depository institutions when borrowing from the Reserve Banks. This last activity is subject to approval by the Board of Governors due to the fact that, by raising or lowering the rate, the System can influence the cost and availability of money and credit.
    Federal Reserve System’s bodies are integrated by commissions that advice the Board of Governors on several issues. Among these commissions are the Federal Advisory Council, which gives recommendations to the Board about its responsibilities, the Consumer Advisory Council, which deals with consumers’ financial services, and the Thrift Institutions Advisory Council, which provides information about economic institutions’ needs and problems.

    3. Monetary policy instruments

    The Federal Reserve Act of 1913 calls on the Federal Reserve System to set the nation’s monetary policy in order to promote the objectives of maximum employment, stable prices and moderate long-term interest rates. In particular, the FED should ensure the right amount of reserves able to promote liquidity and credit expansion in line with the objectives of price stability and sustainable economic growth. The main monetary policy instruments the FED has consist of the determination of monetary demand and the definition of the discount rate, through the activity of the Board of Governors together with the Federal Banks, and the realization of open-market operations through the Federal Open Market Committee. By means of these instruments, the FED can influence the demand and supply for balances at the Federal Reserve Banks, thus controlling the federal funds rate3.

    4. Monitoring and controlling

    The Federal Reserve System monitors and controls the activity of several financial institutions with the objective of ensuring their stability, the financial markets’ solidity and an equal and fair treatment of customers in financial transactions. In particular, the FED’s monitoring activity includes the audit and supervision of banks on their conformity with laws and regulations. In case of non-fulfillment, the FED’s Surveillance Authority takes both formal and informal actions aimed to resolve the problem. The controlling activity concerns the emanation of specific regulations and guidelines aimed to regulate activities, operations and acquisitions of different banking organizations.
    1The president of the Federal Reserve Bank of New York serves on a continuous basis, while the presidents of the other Reserve Banks serve one-year terms on a rotating basis beginning on the 1st of January of each year. The rotation is such that each year one member is elected to the Committee by the boards of directors of Reserve Banks in each of the following groups: (1) Boston, Philadelphia, and Richmond; (2) Cleveland and Chicago; (3) Atlanta, St. Louis, and Dallas; and (4) Minneapolis, Kansas City, and San Francisco.
    2All depository institutions that are subject to reserve requirements set by the Federal Reserve … including commercial banks, mutual savings banks, savings and loan associations and credit unions … have access to the "discount window".
    3The federal funds rate is the interest rate at which private depository institutions lend balances (federal funds) to other depository institutions
    at the Federal Reserve, usually overnight. A change in the federal funds rate can set off a chain of events that will affect other short-term interest rates, longer-term interest rates, the foreign exchange value of the dollar, stock prices and other variables such as employment, household, and business spending decisions and goods price level.
    Bauer P. W., Hancock D. (1993), The Efficiency of the Federal Reserve in Providing Check Processing Services, Journal of Banking and Finance. No. 17, pp. 287-311.
    Broz J. L. (1997), The International Origins of the Federal Reserve System, Cornell University Press.
    Mullins E. C. (1952), Secrets of the Federal Reserve, John McLaughlin.
    Wicker E. (1966). Federal Reserve Monetary Policy, 1917-33. Ohio State University Press.
    Board of Governors of the Federal Reserve System (2003), The Federal Reserve System: Purposes and Functions, System Publication.
    Editor: Federica ALFANI
    © 2009 ASSONEBB

  • FIAT

    Fiat, a promoter of Assonebb, is an international auto group that designs, produces and sells vehicles for the mass market under the Fiat, Alfa Romeo, Lancia, Abarth and Fiat Professional brands, as well as luxury and performance cars under the Ferrari and Maserati brands. The Group has expanded its global reach through the alliance with Chrysler Group, whose product portfolio includes Chrysler, Jeep, Dodge, Ram and SRT brand vehicles. Fiat Group also operates in the components sector, through Magneti Marelli and Teksid, and in the production systems sector, through Comau.
    Fiat was founded at the end of the 1800s … a period filled with the fervour of grand initiatives, inventive spirit and new ideas … and was destined to rapidly become one of the world’s leading industrial groups. Its story is deeply connected with that of industrialisation in Italy and the brand is today a byword for beauty, Italian style, roaring engines and affordable quality.

    On 11 July 1899, the deed of incorporation was signed giving birth to Società Anonima Fabbrica Italiana di Automobili Torino … F.I.A.T. The first car built was the 4 HP. In 1900, the first plant was inaugurated and production reached 24 cars a year. In 1902, Giovanni Agnelli became Managing Director. In 1903, the company was listed on the stock exchange and began producing its first vehicles for goods transport. In 1906, out of a total 8 million lire in annual sales, export sales reached 6 million lire. The auto production was expanded with the addition of the 8, 10, 12, 24, 60, 100 and 130 HP models. The company also began making trucks, buses, trams and marine engines. In 1908, the company began the manufacture of aircraft engines: the first developed was the 50hp SA 8/75, which incorporated the experience acquired on the auto racing circuit.
    In Europe, as the new century unfolded, significant economic and scientific progress continued. But the outbreak of the Great War had a considerable impact on the industrial activity, as it had to be transformed to support the country’s military effort. In 1910, six new models were launched: the 12-15 HP, 15-20 HP, 20-30 HP, 30-45 HP and the Type 5 and Type 6. Between 1912 and 1914, Fiat cars won a number of international races, such as the American Grand Prize, the Indianapolis 500-Mile Race and the Gothenburg-Stockholm Winter Cup. The first small displacement production car, the Fiat Zero, was created. In 1914, as part of the war effort, almost 20,000 units of the 18BL lorry were produced and, in the following years, various aircraft engines. Between 1915 and 1917, construction began in the Lingotto factory, the largest in Europe at the time. The Group entered the steel and railway sectors. In 1919, immediately after the war, the 501 “economy”, 505 and 510, as well as its first tractor, the 702 came out. Life in post-war Italy was marked by intense political and social conflict. These were difficult years for the company, requiring rigorous attention to cost management. In 1923, the crisis being overcome, the Lingotto factory was inaugurated and it became the symbol of a Fiat whose future was then inextricably linked to the concept of industrialised production. Inside the factory, the assembly line was introduced and working methods were transformed. In 1920, Giovanni Agnelli became Chairman of Fiat. In 1922, the AL biplane, Fiat’s first civil aviation aircraft, took its maiden flight. The same year, the company established Grandi Motori for the construction of marine engines.
    The Twenties saw the release of many models, including the launch of the SuperFiat, the 519, a six-cylinder luxury car, the 509 and the 503. In 1927, the 520 was offered in left-hand drive and, in 1928, aluminium cylinder heads were adopted on production model cars, representing a world first. 1929 saw the arrival of the economical 514 and the elegant 525. The 1014 van was also launched: with six wheels, dual transmission and articulated chassis, this vehicle was unbeatable off road.
    For Fiat, the early 1930s were marked by the consolidation of its manufacturing base and by significant expansion abroad: from France to Spain, Poland and the USSR. In 1930, the “Littorina”, the world’s first railcar, was introduced, while the 700C tractor was launched in 1932. Between 1930 and 1935, Fiat released 15 more models. Some were to become milestones in automobile history: the popular 508 Balilla, the deluxe 518 and 527 Ardita, the aerodynamic 1500, the economic 500 Topolino and the 1100 “Musone”. In 1934, Francesco Agello reached 709.209 kilometres per hour in a Macchi-Castoldi M.C.72 powered by a Fiat AS6 engine, setting a world record for propeller-driven seaplanes that remains unbeaten. In 1937, construction began in the Mirafiori plant. It was inaugurated two years later, introducing the most advanced working methods in Italy.
    With entry into the war, Fiat had to convert production to military purposes. The company dramatically reduced the production of cars, while the output of trucks was multiplied five-fold. Armoured vehicles, airplanes and marine engines were also produced. In 1940, the Fiat 016 locomotive exceeded 160 kilometres per hour, breaking the world speed record in the diesel engine category. In 1942, the 700D wheeled tractor and the model “50”, the first diesel-powered heavy crawler, were launched. The latter was hidden underground for fear of requisition by the Germans. It was recovered at the end of the war and mass production began. Senator Agnelli died on 16 December 1945 and Vittorio Valletta became Chairman. The large-scale production of cars was resumed, with models such as the 500B berlinetta and estate, the refreshed 1100 and 1500, and the sporty 1100S. Alongside these were trucks and buses, high-power tractors, railcars, airplanes and large marine engines. In 1949, the number of employees topped 71,000 and the company returned to bottom line growth.
    In the Fifties, Italy experienced a period of economic boom and the car industry was one of the main drivers of intense growth: one car for every 96 inhabitants in 1949 became one for every 28 inhabitants in 1958 and one for every 11 inhabitants by 1963. Fiat had more than 85,000 employees and car production grew six-fold over the decade. In 1951, the transatlantic liner Giulio Cesare, powered by a Fiat engine, entered service and Italy’s first jet, the Fiat G.80, took flight. In 1952, the high-performance 8V sports car reached 200 kilometres per hour and the 7002 model helicopter was presented. The same year, production began on the 682N lorry which went on to be produced for more than a quarter of a century and became a milestone in transport history. In 1953, the 1400, Italy’s first diesel-powered passenger car, was launched. In 1955, the popular 600 arrived, the first Fiat rear-wheel drive passenger car. Fiat Impresit, a company specialised in civil engineering founded in 1929, constructed roads, tunnels, bridges and dams, such as the Kariba dam on the Zambesi river. In 1956, the new 500 and the Autobianchi Bianchina were launched. The Fiat G.91 was selected as tactical fighter for the NATO.
    The decade of the Sixties began with a general spirit of optimism and the economic miracle continued in Italy. Fiat experienced a dramatic increase in production volumes: the number of cars constructed per year went from 425,000 to 1,741,000; trucks from 19,000 to 64,800; tractors from 22,637 to 50,558; earthmovers from 3,000 to 6,255. Fiat doubled the number of employees to almost 171,000. In 1964, the two-door, five-seat Fiat 850 sedan was launched. In 1966, Giovanni Agnelli, grandson of the founder, became Chairman. A major agreement was signed for the construction of the Vaz plant in Togliattigrad, Russia, which would produce two thousand Zigulì passenger cars a day. In 1967, Vittorio Valletta died. Production began at the Rivalta plant, and Fiat took a majority stake in Magneti Marelli. The 124 was named “Car of the Year” and the Fiat Dino Coupé was launched with its engine based on Ferrari technology. In 1969, the company acquired Lancia and purchased a 50% interest in Sefac-Ferrari. The same year, Fiat Ferroviaria designed and produced the Pendolino, the world’s first tilting train. In 1970, the 128, Fiat’s first front-wheel drive car, was named “Car of the Year”.
    Toward the end of the 1960s, there was a long period of protests and social unrest that also involved Fiat and had significant repercussions on the group’s results. Despite these difficulties, the group invested heavily in Southern Italy and began the construction of plants located in Termini Imerese, Cassino, Termoli, Sulmona, Vasto, Bari, Lecce and Brindisi. During the same period, Fiat began the process of decentralising its operating activities, transforming the company into an industrial holding. Among the first companies to be established were Fiat Macchine Movimento Terra, Fiat Engineering, and Iveco. In 1971, the 127 was presented, which achieved extraordinary success and the following year won the “Car of the Year” award. The historic sports brand Abarth became part of the Group.
    In 1972, Lancia started the production of Beta, which was followed by Stratos, Gamma and Delta. The same year, Lancia won the World Rally Constructors’ Championship and took the title again in 1974, 1975 and 1976. Fiat won in 1977 and 1978. In 1975, Ferrari won the Formula 1 World Championship. This triumph was repeated in 1977 and 1979. In 1976, Centro Ricerche Fiat was founded. In 1978, the innovative car chassis assembly system, “Robogate”, was installed at some plants. At the same time, new factories were constructed in Italy and Brazil. Comau and Teksid were established. In 1979, Fiat Auto grew and eventually brought together the Fiat, Lancia, Autobianchi and Ferrari brands.
    In the Eighties, the industrial world underwent profound changes, linked above all to the development of electronics and new materials. Attention to the environment also increased, and Fiat demonstrated its sensitivity by creating electric and natural gas vehicles, and by setting up the Fare project, for the recycling of cars destined for demolition. In 1980, the launch of Panda took place, which immediately became a key player in the economy segment. In 1983, at Cape Canaveral in Florida, Fiat Auto presented the new Uno, a symbol of innovation and technological rebirth for the company. It went on to win the “Car of the Year” award in 1984. In 1984, Alfa Romeo became part of the Group.
    In 1985, the production of the innovative FIRE (Fully Integrated and Robotised Engine) began. Two years later, the world’s first direct-injection diesel engine for passenger cars was developed.In 1988, the state-of-the-art research centre Elasis was established at the Group’s initiative. The same year, the Fiat Tipo was named “Car of the Year”. Other cars to achieve success during the decade were the Fiat Regata and Croma, the Lancia Delta, Thema and Y10, the Alfa Romeo 164, and the Ferrari GTO, Testarossa and F40, as well as the commercial vehicles Fiorino and Ducato.
    In the 1990s, in response to increasingly tough international competition, Fiat Group adopted a multi-track strategy: on one side, it invested in product and process innovation and the search for new markets with high development potential outside Europe, and, on the other, it implemented a plan for cost containment and internal reorganisation. In 1990, Panda Elettra was the first mass-produced electric vehicle. In 1993, the company acquired the prestigious automaker Maserati and also introduced Progetto Autonomy to facilitate mobility for the disabled. In 1995, 1996 and 1998, Fiat Punto, Fiat Bravo-Brava and then Alfa Romeo 156 were named “Car of the Year”. In 1997, Alfa Romeo 156 became the first car in the world to be fitted with a diesel engine with the Common Rail system, which, within the space of a few years, revolutionised the market for diesel-powered cars. In 1998, the Fiat Multipla, Lancia Lybra and new Punto arrived on the market. In 1999, the world’s first automated manual transmission (Selespeed) went into mass production. During the same year, CNH-Case New Holland was formed to create a leading global player in agricultural and construction equipment.
    During the first decade of the 21th century, the Group went through a profound cultural change and refocused its activities to concentrate on the automotive sector. All the brands of the Group launched new models: Fiat presented a restyling of Punto, the new Idea, Bravo, and re-launched the iconic 500; Alfa Romeo debuted with the 159, 166, MiTo and Giulietta; for its 100th anniversary, Lancia launched the new Ypsilon; from Maranello, production of the innovative Ferrari F430 and 599 GTB Fiorano began; whereas Maserati came out with the captivating GranSport and GranTurismo coupés. In 2000, an industrial alliance was formed with General Motors that would be dissolved in 2005. Alfa Romeo brought out the 147, which was elected “Car of the Year” the following year. In 2000, Fiat presented Stilo, and the following year Lancia launched Thesis, its new flagship luxury model. In 2003, after almost half a century at the helm of the company, Giovanni Agnelli died and his brother Umberto took over as Chairman. Fiat invented the MultiJet technology and the SDE, the smallest direct-injection diesel engine ever produced. In Brazil, the company introduced the flexfuel technology, which enables two different fuels (e.g., gasoline and ethanol) to be mixed in the same tank. In 2004, Umberto Agnelli died and the Group’s new leaders were appointed: Luca Cordero di Montezemolo as Chairman, John Elkann as Vice Chairman and Sergio Marchionne as Chief Executive Officer. Panda won the “Car of the Year” award. In 2005, Fiat Group returned to profitability and the 16v 1.3 MultiJet engine was named “Engine of the Year”. FPT Powertrain Technologies was established. In 2006, the launch of the TetraFuel system for alternative fuels took place. In 2007, at the end of January, Fiat launched the new Bravo. In March, one of the most prestigious sports car brands in history, Abarth, was re-launched with its reinterpretation of Grande Punto. On July 4th, the new Fiat 500 hit the market and became an instant success. In 2008, it was named “Car of the Year”. In 2008, the new Lancia Delta, Alfa 8C Spider, the 500 Abarth and Fiorino were all presented for the first time at the Geneva Motor Show. A few months later, Fiat launched the “free space” Qubo and the Grande Punto Natural Power. On 10 June 2009, Fiat Group and Chrysler Group LLC announced that they had signed a global strategic alliance. The same year, FPT introduced the MultiJet II as well as the MultiAir, a revolutionary electro-hydraulic valve control system. In December, the new Doblò arrived. In addition, Fiat S.p.A. was recognised as a sustainability leader and entered the Dow Jones Sustainability World and Dow Jones Sustainability STOXX indexes. In 2010, John Elkann became Chairman of Fiat. The company launched two important innovations, the TCT (Twin Clutch Transmission) technology and the TwinAir, the world’s first high-tech two-cylinder engine. In April, the debut of Alfa Romeo Giulietta took place, and the 500,000th unit of the new 500 rolled off the production line. On September 16th, the shareholders approved the plan for the demerger of Fiat S.p.A.’s industrial activities and the creation of a new group headed by Fiat Industrial S.p.A.. The demerger took effect on 1 January 2011. Under the new structure, Fiat consists of FGA, Ferrari, Maserati, Magneti Marelli, Teksid, Comau and Fiat Powertrain Technologies (the “Passenger & Commercial Vehicles” powertrain business). The new group headed by Fiat Industrial S.p.A., which is listed on Borsa Italiana (Italian Stock Exchange), consists of CNH, Iveco and FPT Industrial (the “Industrial & Marine” powertrain business).

    Fiat S.p.A. is today engaged in accelerating and consolidating the process of integration with Chrysler, in order to establish an international car-building company determined to be one of the leaders in the sector.
    At 31.12.2012, the total revenues of Gruppo Fiat were 59,559 million euros, with 197,021 employees all over the world, 155 plants (46 of which in Italy), 77 research and development centres, and international deals in Europe, Asia and America.
    Lastly, since 1963, Centro Storico Fiat, located in Turin, is hosted by an Art Nouveau building that was built as the first expansion (1907) of the workshops located on Corso Dante, the company's first home. Centro Storico Fiat hosts a collection of automobiles, mementos, models and advertising manifestos by artists spanning the company's entire history.

    Fiat is a promoter of Assonebb and it supports the development of Bankpedia.
    The history of Fiat in six minutes has been summarised by Sky Tg 24 (audio in Italian).

    Link: www.fiatspa.com


    It's an Italian Law (Law 468/1978) presented annually to the Parliament by the Minister of the Economy and Finance, together with the Budget Law. The Finance Act regulates the economic life of the country for a year, introducing rules about revenue and expenses and determining the public debt. The Finance Act must consider the European financial constraints due to the Fiscal Compact. Since 2009 it has been officially replaced by the Stability Law (Law 196/2009).

    The Finance Act contains provisions aimed at achieving financial effects from the first year considered in the multi-annual budget and in particular:

    - The maximum level of net borrowing and the access to the market for each of the years considered in the multi-annual budget ;

    - The amounts of special funds in the current and capital accounts;

    - The annual fees to be budgeted relating to permanent laws of expenditures;

    - The total amount allocated to the renewal of contracts of public employment and for any changes in the treatment of non-contracted staff of public administrations;

    - Other adjustments purely quantitative postponed to the budget law by the legislation in force;

    - Changes in tax rates, deductions, taxes;

    - The Government funding for a year of capital expenditure, if in the last financial year, these capital expenditure were provided in national budget; the Government funding of capital expenditure for one or more years to support the national economy, where required by law;

    - Reductions of legislative expenditure authorizations for each year of the multi-annual budget;

    - Regulatory changes that involve revenue increases or spending reductions;

    - Increases in spending or revenue reductions intended to support or to revitalize the economy, excluding localist measures.

    Editor: Giovanni AVERSA


    Edited by James M. Boughton and Domenico Lombardi, 336 pages | 234x156mm 978-0-19-923986-3 | Hardback | 25 June 2009

    This book provides an assessment of the role of the International Monetary Fund (IMF) in poor countries. In recent years, a large portion of the work of the IMF has focused on the economies of low-income countries by aiming to create conditions conducive to poverty reduction and stable economic growth. More than two fifths of the IMF's 185 members are low-income countries and many others have substantial pockets of poverty in their populations. Since economic development and the reduction of poverty are the most important economic challenges that these countries face, how can the IMF best help them? How can the imperative of macroeconomic and financial stability be reconciled with the requirements for sustained economic growth? This volume brings together the research of leading economists, political scientists, and historians to suggest ways for the IMF to address these issues effectively. It includes contributions from leading academics and experts including economists, political scientists, and historians. It is a unique and innovative volume on the history, policies, and financing of the IMF in the world's poorest regions which brings together leading research on economic growth, poverty reduction, and macroeconomic stability.

    © 2011 ASSONEBB


    The book by Daniele Fano, titled FINANCIAL ACCOUNTS IN THE SYSTEM OF NATIONAL ACCOUNTS AND IN THE CURRENT ECONOMY, is a very helpful tool for the academia, policy makers and macroeconomists. Financial accounts represent the basis for financial analysis of macroeconomic systems, and their flows, but has been mostly ignored before the financial crisis started.

    The book is divided into 3 blocks: in the first the financial accounts are derived from the System of National Accounts; in the second the institutional sector is analysed, and in the third Financial Accounts are used as a tool to analyse financial systems and their stability.

    The book has been published by Universitalia in June 2012.

    Assonebb 2012


    The Financial Action Task Force (FATF) is an inter-governmental body, established by the G-7 Summit in 1989, with the purpose of promoting national and international policies to combat money laundering. In 1990, the FATF established a set of Forty Recommendations, which provides the international standards for anti - money laundering (AML) strategies. In October 2001, following the terrorist attack of September 11th, the FATF issued the Eight Special Recommendations to combat terrorist financing and revisited the previous Recommendations to respond to the continued evolution of money laundering techniques. In 2004, it issued a Ninth Special Recommendation, further improving AML techniques. The FATF monitors its current 35 members' compliance with its Standards and periodically reviews its mission. In performing these activities, the FATF collaborates with other important international entities as the International Monetary Fund (IMF), the World Bank, the United Nations , the Basel Committee on Banking Supervision (BCBS) and the Egmont Group.
    Link: http://www.fatf-gafi.org/pages/0,2987,en_32250379_32235720_1_1_1_1_1,00.html
    Editor: Bianca GIANNINI
    © 2010 ASSONEBB


    Financial assets, also referred to as financial instruments or securities, are intangible assets. They are often used to finance the ownership of tangible assets as equipments and real estate. In general, financial assets serve two main economic functions: the first is to transfer funds from those who have surplus funds to invest to those who need a source of financing tangible assets. The second is to redistribute the risk associated to the investment in tangible assets between different counterparties according to their preferences and risk aversion. Financial assets represent legal claims to future cash expected often at a defined maturity. The counterparties involved in the agreement are the institution or entity that will pay the future cash (issuer) and the investors. Some examples of financial assets are: stocks, bonds, bank deposits, loans. All these instruments can be classified in different categories according to the features of the cash flow associated with them. They can be classified as debt instruments or equity instruments. Debt instruments as bonds or loans require a fixed amount payment; equity instruments have an uncertain cash flow, based on the issuer’s earnings. Equity instruments are also referred to as residual claims because the issuer can satisfy these claims only after holders of debt instruments have been paid. There are also fixed income instruments that can be paid only after claims on debt instruments have been satisfied. This is the case of preferred stocks and convertible bonds. In general, all financial assets present some typical properties. Financial assets can be used as a medium of exchange or can be converted into money at little cost or risk. This attractive property for investors is called moneyless. Divisibility and Denomination refers to the minimum amount or size in which assets can be traded. For instance, US bonds are generally sold in $ 1,000 denominations, commercial paper in $25,000 units and deposits are infinitely divisible. Another property of financial assets is reversibility, also referred to as turnaround cost or round-trip cost. It indicates the cost of buying an asset and then re-selling it. The Cash Flow is the return associated to the investment on financial assets corresponded in different forms according to the type of financial asset as dividends and options of stocks or coupon payments on bonds. Term to maturity is the length of the period until the final repayment date or the date at which the owner can demand the asset liquidation. In different cases the financial assets may terminate before the stated maturity (in presence of call provisions, bankruptcy of the issuer...) or can be also increased or extended on demand of both counterparties. Convertibility relates to the possibility to convert the financial assets into another type of asset. This is the case of convertible bonds and preferred stocks. Currency refers to the currency in which the asset’s cash flow is denominated. There are some assets denominated in one currency that allow to earn cash flow in a different currency (dual currency securities), created to reduce the exchange rate risk. For example, some types of Eurobonds can pay interest in one currency and principal in a second currency. Another property that characterizes financial assets is the Liquidity. The degree of liquidity of an instrument can be determined either in the financial market or it can be determined by means of contractual obligations. An example of agreement that can determine the degree of liquidity of an instrument is the claim of a private pension fund. In this case, the asset is clearly considered illiquid in that the claim can be satisfied not before the retirement date. Another basic property is the Risk/Return predictability, for which the riskiness associated to an asset depends on the uncertainty about future interest rates and future cash flow (nominal expected returns). In case the future cash flow is known in advance, as contractually determined, the uncertainty may regard only the solvency of the debtor. A financial asset can be also regarded as a combination of two or more simpler financial instruments whose value is the sum of the price of its component parts. For instance, the price of a callable bond corresponds to the price of a similar non-callable bond less the value of the option that allows the issuer to redeem the bond early. This property is called Complexity. Finally, the last property is the so-called Tax status which depends on the governmental regulations applying to the asset. The tax treatment generally varies according to the issuer and owner nature, the asset maturity, the country’s or different territorial unit's legislation, and so on.
    These properties are important to determine the pricing of the financial asset. Basically, the true or correct price of a financial instrument is equal to the present value of its expected cash flow. However, there are several theories on the pricing of financial assets directly related to the notion of expected returns.

    Fabozzi F., Modigliani F., Jones F. (2010), Foundation of Financial Markets and Institutions, Pearson International Edition.

    Editor: Bianca GIANNINI
    © 2010 ASSONEBB


    In 1995, the word was used for the first time by Leyshon and Thriftto indicate the limited physical access to banking services as a result of bank branch closures. It was with Kempson and Whyley (1999) that the term was used with the current meaning to describe the case of a growing group of people who face barriers to gain access to mainstream financial services and products. Today, financial exclusion is largely recognized as a part of a much wider social exclusion.

    Leyshon, A. and Thrift, N. (1995). Geographies of financial exclusion: financial abandonment in Britain and the United States. Transactions of the Institute of British Geographers, New Series, 20, pp.312-341
    Kempson, E. and Whyley, C. (1999). Kept Out or Opted Out? Understanding and Combating Financial Exclusion. Bristol: Policy Press.
    Editor: Melania MICHETTI
    © 2009 ASSONEBB


    Investment-related contracts or documents of title. Also referred to as “securities”.

    ©2012 Editor: Camera dei Lords


    Financial literacy is the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources. Understanding basic financial concepts allows people to know how to navigate in the financial system. People with appropriate financial literacy training make better financial decisions and manage money better that those without such training.

    The Organization for Economic Co-operation and Development (OECD) started an inter-governmental project in 2003 with the objective of providing ways to improve financial education and literacy standards through the development of common financial literacy principles. In March 2008, the OECD launched the International Gateway for Financial Education, which aims to serve as a clearinghouse for financial education programs, information and research worldwide. In the UK, the alternative term "financial capability" is used by the state and its agencies: the Financial Services Authority (FSA) in the UK started a national strategy on financial capability in 2003. The US Government also established its Financial Literacy and Education Commission in 2003.

    Italy, among the poorest countries in terms of national financial literacy indicators, established in 2015 a Governmental committee to develop Financial literacy and education, Quello che conta.


    Approved by the European Commission on 11 June 1999, the Financial Services Action Plan (FSAP) sets down guidelines, for the years 1999-2005, for creating an integrated European financial market. The FSAP sets three strategic objectives - and a timetable of measures specifically designed to achieve them: 1) integrating wholesale financial markets; 2) opening retail markets and services; 3) harmonising and strengthening supervisory rules. In assessing progress at the end of the 1999-2005 period, the European Commission noted that 98% of the actions called for in the FSAP were completed within the scheduled time period. The White Book named “Financial Services Policy for the 2005-2010 period” (COM (2005) 629 def., 1 December 2005) describes the Commission’s priorities for the years 2005-2010.
    Editor: Maria Giovanna CERINI
    © 2010 ASSONEBB


    The Financial Stability Board was established in April 2009 on occasion of the G-20 London Summit, as the successor of the pre-existing Financial Stability Forum. Its aim is to promote the stability of the international financial system, improve the functioning of the financial markets, and reduce systemic risks, through the exchange of information and international cooperation among supervisory authorities, central banks, and supra-national organisations.

    Brief history

    On occasion of the Bonn summit in February 1999, the Finance Ministers and Central Bank Governors of the Group of Seven (G-7) countries agreed … as recommended by then Bundesbank Chairman Hans Tietmeyer … to establish an institutional entity charged with facilitating cooperation between national and supra-national regulatory and supervisory authorities, called Financial Stability Forum (FSF). The first meeting of the new group was held in Washington, in April 19991.
    In November 2008, at the Washington summit, the Heads of State and Government of the G-20 called for an expansion of the FSF, both in terms of the number of participants and mandate, to improve its effectiveness in safeguarding the stability of the financial system2.
    New members joined the Forum at the London plenary summit of 11 and 12 March 2010, including the European Commission, Spain, and a large number of still unrepresented emerging countries of the G-20 (Argentina, Brazil, China, India, Indonesia, Korea, Mexico, Russia, Saudi Arabia, South Africa, and Turkey).
    In April 2009, with the final communiqué of the G-20 London Summit, the FSF’s mandate was extended (see below) and its name was changed to Financial Stability Board3. The FSB’s inaugural meeting was held in Basel on 27 June 2009.


    According to article 2 of the Charter, the mandate and tasks of the FSB include:

    - assessing vulnerabilities affecting the global financial system, and identifying and reviewing the regulatory and supervisory actions needed to address them;
    - promoting coordination and information exchange between authorities responsible for financial stability;
    - monitoring and advising on market developments and their implications for the regulatory policy;
    - advising on and monitoring best practice in meeting regulatory standards;
    - undertaking joint strategic reviews of the policy development work of international standard setting bodies;
    - setting guidelines for and supporting the establishment of supervisory colleges;
    - managing contingency plans for cross-border crisis management, in particular when systemically relevant institutions are involved;
    - collaborating with the International Monetary Fund (IMF) in conducting early warning exercises.

    The members of the FSB commit themselves to pursuing the maintenance of the financial system stability; guaranteeing its openness and transparency; implementing international financial standards, including the so-called 12 key International Standards and Codes4.
    Moreover, they agree to undergo periodic peer reviews, also based on evidence and data presented by the IMF and the World Bank in their public Financial Sector Assessment Program (FSAP) reports.

    Structure and governance

    The FSB currently consists of four internal structures: the Plenary Board, the Steering Committee, the Chairperson, and the Secretariat.
    The Plenary Board is the decision-making body of the FSB and is formed by representatives of the institutions listed in Table 1 (see below). It meets at least twice a year, normally in March and September; additional extraordinary meetings may be called by the Chairperson as circumstances arise.

    Members of the Financial Stability Board
    The Steering Committee is charged with implementing the decisions taken by the Plenary Board; its composition is decided by the Plenary Board, so as to ensure balanced representation and operational effectiveness.
    The FSB Chairperson is appointed by the Plenary Board for a term of three years, renewable only once. The Chair convenes and chairs the meetings of the Plenary Board and of the Steering Committee; it represents the Board externally; it takes all decisions and acts as necessary to achieve the objectives of the FSB, in accordance with the directions given by the Plenary Board. Since 2006, the FSB has been chaired by Mario Draghi, Governor of the Bank of Italy; he was preceded as Chairman by Andrew Crockett (1999 / 2003) … then General Manager of the Bank for International Settlements (BIS) … and Roger W. Ferguson (2003 / 2006), then Vice Chairman of the Board of Governors of the Federal Reserve.
    The FSB Secretariat is located in Basel, at the BIS.
    According to Article 11 of the Charter, the Plenary Board may establish Standing Committees and working groups to support the FSB’s mission; Annex B of the Charter establishes three Standing Committees (Standing Committee on Assessment of Vulnerabilities, Standing Committee for Supervisory and Regulatory Cooperation, Standing Committee for Standards Implementation), and three working groups (Cross-border Crisis Management Working Group, Expert Group on Non-cooperative Jurisdictions, Working Group on Compensation)5.


    Over time, the activity of the FSB has embraced several fields of action:
    - Compensation Practices
    - Credit Risk Transfer (CRT)
    - Crisis Resolution
    - Enhanced Disclosure
    - Highly Leveraged Institutions (HLIs)
    - Implementation of Standards
    - Market and Institutional Resilience
    An updated archive of the FSB’s publications on each of the issues listed above is available from the FSB’s website (http://www.financialstabilityboard.org/, “Publications by category” section).
    The financial crisis has contributed to focusing the Board’s reflections in particular on issues tied to remuneration, the improvement of standards, and the governance of markets and institutions.
    In 2009, the “FSF Principles for Sound Compensation Practices” were published, and intended to reduce incentives towards excessive risk taking that may arise from the structure of compensation schemes. The publishing of the “Principles”, in April, was followed in September by the “Implementation standards”. The implementation of the “Principles” is regularly monitored by the FSB.
    Also in April 2009, the “FSF Principles for Cross-border Cooperation on Crisis Management” were published, aimed at encouraging cooperation between member-state supervisory agencies, central banks, and finance ministers, both in preventing and managing financial crises. The note “Exit form Extraordinary Financial Sector Support Measures” followed in November, on the exit from the exceptional financial sector support measures introduced since 2007: the note was discussed at the meeting of the G20 Finance Ministers and Central Bank Governors in St. Andrews (UK) on 6 and 7 November 2009.
    Lastly, the breadth of the reflections made as of 2009 by the FSB … in some cases jointly with other supranational agencies … is worthy of note: they are on the issue of improving financial stability, with particular reference to the themes of pro-cyclicality (see for instance the “Report of the Financial Stability Forum on Addressing Procyclicality in the Financial System”, April 2009), information (“The Financial Crisis and Information Gaps”, published jointly with the International Monetary Fund Staff in October 2009), and systemically relevant institutions (“Guidance to Assess the Systemic Importance of Financial Institutions, Markets and Instruments: Initial Considerations”, November 2009).
    On behalf of the G-20, the FSB regularly monitors all the progress made in terms of the reform of the international regulatory framework.

    1FSF member institutions included the national supervisory agencies of Australia, Canada, France, Germany, Japan, Hong Kong, Italy, the Netherlands, the United Kingdom, Singapore, the United States, and Switzerland. Other international organisations also took part in the Forum (World Bank, ECB, BIS, IMF, and OECD), together with the main international standard-setters (Basel Committee, IOSCO, IASB, etc.).
    2The summit’s final communiqué declares: “The Financial Stability Forum (FSF) must expand urgently to a broader membership of emerging economies, and other major standard setting bodies should promptly review their membership. The IMF, in collaboration with the expanded FSF and other bodies, should work to better identify vulnerabilities, anticipate potential stress, and act swiftly to play a key role in crisis response” (“Declaration, Summit on Financial Markets and World Economy”; November 15, 2008).
    3See the Annex to the summit’s final communiqué, “Declaration on Strengthening the Financial System - London Summit, 2 April 2009”.
    4By initiative of the FSF, and with the collaboration of the international standard-setters that are part of it, a Compendium of Standards has been drawn up which lists 12 standards considered as deserving priority implementation. The standards identified are relevant in three policy areas: Macroeconomic Policy and Data Transparency, Institutional and Market Infrastructure, Financial Regulation and Supervision
    5A description of the objectives of the three Standing Committees is provided in the press release issued following the FSB’s inaugural meeting (“Financial Stability Board holds inaugural Meeting in Basel”, 27 June 2009). A brief summary of the progress made by the Standing Committees is offered in the document “Overview of Progress in Implementing the London Summit Recommendations for Strengthening Financial Stability … Report of the Financial Stability Board to G-20 Leaders” (25 September 2009).

    Editor: Maria Giovanna CERINI
    © 2011 ASSONEBB


    Fintech refers to the novel processes and products that become available for financial services thanks to digital technological advancements. More precisely, the Financial Stability Board defines fintech as “technologically enabled financial innovation that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services1).
    The areas of actual and potential expansion of Fintech are: a) transactions execution (payments, clearing and settlement); b) funds management (deposit, lending, capital raising and investment management); and c) insurance.
    The ability to impact on essentially all the services typically offered by traditional financial institutions, such as banks, comes from cost reductions implied by digital technology advancements, improved and novel products for consumers and limited regulatory burden. More specifically, with technological advancements Fintech operators benefit from: i) lower costs of search that enable matching in financial markets more effectively, ii) economies of scale in collecting and manipulating large bunches of data, iii) cheaper and more secure transmission of information, iv) lower costs of verification.

    Source: what is Fintech http://european-economy.eu/2017-2/fintech-and-banks-friends-or-foes/


    Commitments to enter into transactions on specific terms.

    ©2012 Editor: Camera dei Lords

  • First-Degree Stochastic Dominance

    First-Degree Stochastic dominance: It is a form of stochastic ordering that means ordering something that is random. In decision theory and decision analysis this concept allow to rank different probability distribution over possible outcomes. Stochastic dominance allow to determine the preference of an expected utility maximizer between different probability distributions over possible outcomes, with minimal knowledge about the decision maker's utility function.
    Set W the decision maker's wealth level and U his utility function. Assume that U is weakly increasing and that more is preferred to less. Designate F and G generic cumulative distribution functions of result of different choices. F first order stochastically dominates G if and only if:

    so F is strictly preferred to G.


    Hardaker J. B., Huirne R. B. M.,Coping with risk in Agriculture, CABI, 2004
    MIT OpenCourseWare, Microeconomic Theory III, Spring 2010

    Editor: Giuliano DI TOMMASO


    Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG), which is an agreement under international law, signed on 2 March 2012 by the Member States, with the exception of the United Kingdom and the Czech Republic. It has been adopted on the basis of a modification of the TFEU article 136. The Treaty entered into force on 1 January 2013, thanks to the ratification of twelve Member States, including Italy. The fact represents a result of a differentiated integration within the EU. The Treaty aims to safeguard the stability of the euro area and requires national budgets to be in balance or in surplus. This rule has to be incorporated into national law within one year of the entry into force of the Treaty, using provisions that are guaranteed to be adhered to throughout national budgetary processes. The rule will be deemed to be respected if the country medium-term objective as defined in the revised Stability and Growth Pact is met, with a lower limit of structural deficit of 0.5% of GDP. Any significant deviation from this objective shall cause an automatic correction mechanism. The parties of the Treaty are forced to implement suitable misures over a defined period of time. The ratification of the Treaty is also an essential condition to access and benefit from the EMS. About the governance in the euro area, as expected in the Treaty, there will be informal Euro Summiti meetings, bringing together the Head of state or government of the euro area countries.

    Source: european-council.europa.eu


    Fiscal illusion stems from the study of Amilcare Puviani "Financial theory of illusion"1 (1903) and it is defined as the phenomenon that generates a feeling of easing the tax burden and an increase in social benefits, especially possible in those contexts in which the revenue of the State and the financing of public services are not fully known or controlled by the taxpayer.
    Fiscal illusion occurs to leading taxpayers due to the mistaken perception of living in a context where there was a reduction in the overall level of taxation or even an increase in expenditure on public goods provided without any increase in taxation. Fiscal illusion becomes evident in those contexts in which an increase in provided public services is unperceived by economic agents. They do not get the perception that this increase in services is not made up during the same period of taxation, but rather through the use of public deficit. This implies a simple shift of the increase in taxation to future years, or of an increase in the supply of money, that generates inflationary pressures. Such pressures will cause increases in fiscal pressure and tax revenues, but only in future years.
    1The theory of “financial illusion” argued that, through the management of public finance, public rulers were used to allocate a substantial part of public financial resources to the ruling class, without the working classes knowing. Therefore, the latter were mislead by tactics and deception to come to incorrect assessments of the aims of policy choices, for example by letting them perceive a reduction in taxes while these increased.

    Puviani A. a cura di Volpi F. (1976) "Teoria dell'illusione finanziaria",Milano ISEDI.

    Editor: Alberto Maria SORRENTINO
    © 2009 ASSONEBB


    The Fisher identity (sometimes Fisher effect, from the name of the economist Irving Fisher (1867-1947)) defines the one-for-one adjustment of the nominal interest rate (i) … the amount of money that a unit of initial investment earns … to the expected inflation rate ().
    It derives from the so-called Fisher hypothesis that states, according to the principle of money neutrality, the independence of the real interest rate (r) … the revenue of lent funds after the expected erosion of the purchase power due to the rise in inflation … from the monetary variables. In formulas:
    An example may clarify the meaning of equation (1).
    Let's suppose that a bank posts a nominal interest rate equal to 5 percent per year and that the inflation rate is of 3 percent per year. Then, the real value of the deposits grows of 2 percent per year.
    Figure 1 depicts the changes of the nominal interest rate on the 3-month Treasury Bills (blue line) and the inflation rate measured by the CPI (red line) in the US economy since 1950. The co-movement showed by the two variables provides evidence of the existence of the Fisher effect.

    Editor: Lorenzo CARBONARI
    © 2009 ASSONEBB


    These are securities issued by a government or private company. If issued by a State are called Treasury bonds or Bills. They represent liability capital, and their basic characteristic is fixed return at maturity, which leads to lower risk. Theoretically, fixed income assets are associated to risk-free assets. Return for these assets can be summarised by the term structure, graphically represented by the yield curve. The yield curve shows the risk-free return associated with fixed income assets at different maturities. Fixed income assets can be switched to a stock according to pre-defined rules.
    Typically, the fixed income equation can be represented as:

    , (1)

    where the first right-hand side is the present fixed interest discounted by the interest rate , the second right-hand side is the discounted reimbursement value . The sum of these two values in equilibrium must be equal to in the left-hand side value (issue price).
    If market interest rates do not change over time, the left-hand side always equals the right-hand side for the interest rate in each t up to maturity. This is also a necessary condition to issue the asset in the primary market in .
    In the interest rate in the market can change. This leads to a market interest rate
    that is different from the asset interest rate . If differs from , and with fixed and , then changes. The market demands that the return for the asset aligns with the market return (this condition holds for a market without arbitrage possibilities). This can happen only if changes. The new will be higher than if the interest rate in the market is lower, and lower than if the market interest rate is higher. This mechanism defines the fixed income return in the secondary market. It is worth noting that at issuance, equals by definition. It is not possible to issue a fixed asset with a different interest rate from that of the market rate. The way to represent the fixed income interest rate at different maturities is the term structure. The graphic representation is the yield curve.
    Graphic representation of the term structure through the yield curve of State/ American Government bond/bill market (May 20, 2005).

    The term structure represents information set for the market. The main theories that explain the structure are: i) expectation theory, ii) segmented market, and iii) liquidity premium. Each theory attempts to define and explain the slope and the modifications over time.
    Mayo, H. B., 2007, Investments.
    An Introduction, Thomson South-Western, Seventh Edition;
    Fabozzi, F. J., 2006, Bond Markets, Analysis, and Strategies, Pearson Prentice Hall, Sixth Edition.
    Editor: Rocco CICIRETTI
    © 2009 ASSONEBB


    It is the place where fixed income securities, like sovereign and corporate bonds are traded. Fixed income assets are issued in a primary market and then exchanged in a secondary market. As for the stock market, fixed income assets are traded according to their maturity and risk. These two variables generate what is known as term structure (the yield curve is the graphic representation of the term structure). In Italy, the trading of fixed income assets, company bonds and treasury bonds/bills takes place on the MOT (the telematic market for fixed income assets) and the EuroMOT (telematic market for Euro-fixed income assets issued by international issuers and Asset Backed Securities). These two markets are managed by Borsa Italiana S.p.A. (see Official Exchange trading).
    The MOT has traded treasury bonds/bills and private bonds since 1994. The Euro-MOT was created because of the financial innovation generated by new instruments. This innovation has led to the definition of new trading rules (see International Financial market). One of the most important electronic floors for the trading of these assets is the MTS Group. This company belongs to the Borsa Italiana S.p.A., and it is the only European market for fixed income in the eurozone.
    Fabozzi, F. J., 2006, Bond Markets, Analysis, and Strategies, Pearson Prentice Hall, Sixth Edition.
    Editor: Rocco CICIRETTI
    © 2009 ASSONEBB


    A dramatic fall in US financial markets that took place in May 2010.

    © Editor: Camera dei Lords


    Floating rate notes (FRNs) are an instrument created after the high volatility of the late 1980s. Interests in this kind of bonds are linked to a specific market rate (e.g., government bonds, or labour rate or other indexes) and are periodically rectified according to the market rates’ evolution. Coupons are obviously not fixed, so they will vary over time. For instance, in the euro area these bonds are often linked to the Euribor parameter (3 month, or 6 month, or 12 month rates, for instance), plus/minus a margin according to the quality of the issuer of the bond.
    If the underlying parameter increases over time, obviously we will have progressively higher coupons until the end of the note. The contrary holds.

    The duration of floating rate notes is approximately equal to zero, and their price is affected only marginally by changes in the interest rate curve: coupons automatically reflect these changes (the frequency of this adaptation depends on the frequency of payments, i.e. monthly, quarterly, and so on). This is the reason why FRNs are less risky than fixed rate notes (at maturity, issuer and seniority profile are the same).
    The global yield of FRNs cannot be defined before their maturity. The evaluation procedure is the same as the one generally adopted for fixed rate notes: the goal is to find the discount rate that makes the cash flows come out of the coupons, and that of the capital redemption (bullet or amortizing) that is equal to the capital invested. But since coupons are unknown, we can define the yield of FRNs only ex post.
    Editor: Ugo TRENTA
    © 2009 ASSONEBB


    It is a private investment fund established in April 2016 that aims at funding banks short of liquidity. It is a private fund managed by QUAESTIO CAPITAL MANAGEMENT and its endowment is 4,250 billion euro. Funds come from banks, bankig fundations, the Italian Treasury and Cassa Depositi e Prestiti.

    In 2016 it tried to fund the recovery process of Banca Popolare di Vicenza and Veneto Banca S.C.p.A., but the public offering did not succeed.


    It is a private investments fund that can buy only non-perfoming loans and bad credits from italian banks; its endowment in august 2016 reached 1.750 billion euro. The yield of its investments should be 6%.
    Funds are managed by Quaestio Capital Management, similarly to Fondo Atlante.



    The Food and Agriculture Organization (FAO) is an agency of the United Nations that leads international efforts to improve agriculture, forestry and fisheries practices, ensuring good nutrition and food security. FAO was established on 16 October 1945 in Quebec City, Canada, and to commemorate its foundation every October 16 is celebrated as the "World Food Day”. Actually FAO has 194 member States, along with the European Union and the Faroe Islands and Tokelau, which are associate members. The head office is in Rome. FAO works in partnership with institutions of all kinds: private foundations, grassroots organizations, companies, professional associations, other United Nations agencies, national governments and more. According to the Preamble of FAO Statute the member States promote separate and collective actions aimed at increasing the level of nutrition and standard of living under their respective jurisdictions; improving the production efficiency and distribution effectiveness of all food and agricultural products; improving rural populations conditions; expanding the global economy and to free humanity from hunger.


    FAO was founded 16 October 1945, like first specialized agency within the United Nations. The settlement of this organization occurs at the end of World War II, because the war itself helped to give importance to the problem of food requirements imposed on the people and soldiers.

    The first idea of an international organization for food and agriculture emerged in 1905, which lead to the creation of the International Institute of Agriculture (IIA), thanks Italian initiative.

    The organization of work for the official establishment of FAO, begins in 1935 with the creation of ad hoc committee within the League of Nations and later in 1943 with the Hot Springs Conference in Virginia.

    The Conference, which was attended by 45 countries, concluded with the approval of a final act contains 33 recommendations and the will to creation of the United Nations Food and Agriculture Organization1 . The concrete establishment of this organization was entrusted to the Interim Commission on Food and Agriculture, set up in Washington with representatives of each of the governments and authorities represented at the Hot Springs Conference. Two years later, in the Conference convened in Quebec City on 16 October was born FAO.

    The most important initiatives promoted until today are the "Global Campaign Against Hunger", "World Food Programme (WFP)" and the creation of United Nations Conference on Trade and Development (UNCTAD).


    FAO provides development assistance, provides advice to governments on the subject of general policies, collects, analyses and disseminates information and acts as an international forum to discuss issues related to food and agriculture. Furthermore, its special programs assisting States to be prepared to deal with the crisis and provide emergency food assistance required. FAO mobilizes and manages millions of dollars provided by industrialized countries, development banks and other sources to make sure the projects achieve their goals. Since its founding, the organization has focused special attention on developing rural areas, home to 70 percent of the world's poor and hungry people. Finally, it defines international standards and conventions.

    The main functions of FAO are regulated by Article I of its Statute:

    1. The Organization shall collect, analyse, interpret and disseminate information relating to nutrition, food and agriculture. FAO serves as a knowledge network. It uses the expertise of its staff, agronomists, foresters, fisheries and livestock specialists, nutritionists, social scientists, economists, statisticians and other professionals, to collect, analyse and disseminate data. FAO also publishes hundreds of newsletters, reports and books, distributes several magazines, creates numerous electronic fora.

    2. The Organization shall promote and, where appropriate, shall recommend national and international action with respect to:

    a) scientific, technological, social and economic research relating to nutrition, food and agriculture;

    b) the improvement of education and administration relating to nutrition, food and agriculture, and the spread of public knowledge of nutritional and agricultural science and practice;

    c) the conservation of natural resources and the adoption of improved methods of agricultural production;

    d) the improvement of the processing, marketing and distribution of food and agricultural products;

    e) the adoption of policies for the provision of adequate agricultural credit, national and international;

    f) the adoption of international policies with respect to agricultural commodity arrangements.

    3. It shall also be the function of the Organization:

    a) to furnish such technical assistance as governments may request. FAO lends its years of experience to member countries in devising agricultural policy, supporting planning, drafting effective legislation and creating national strategies to achieve rural development and hunger alleviation goals.

    b) to organize, in cooperation with the governments concerned, such missions as may be needed to assist them to fulfil the obligation arising from their acceptance of the recommendations of the United Nations Conference on Food and Agriculture and of this Constitution. Policy-makers and experts from around the globe convene at headquarters or in the field offices to forge agreements on major food and agriculture issues. As a neutral forum, FAO provides the setting where rich and poor nations can come together to build common understanding.


    FAO has a staff with more than 3600 units and its internal structure is composed by: Conference of the Member Nations, Council of the Organization, the Director General, Departments, Regional Offices, sub-Regional Offices and Country Offices.

    1. Conference of the Member Nations: meets every two years to analyze the activities and approve the work program; decrees the general policy and approves the budget; exudes the Rules of Procedure and the Financial Regulations of the Organization; may make recommendations to Member States on issues related to food and agriculture and elects the Council.

    2. Council of the Organization: is the governing body of FAO and consists of 49 Member States with only one vote each and a prime minister appointed by the Conference. In carrying out its functions, the Board is assisted by a Programme Committee, a Finance Committee, a Committee of the Constitutional and Legal Matters, by a Committee of the products, a Committee of the fish ponds, a Committee of the forest, which a committee of agriculture and a Committee on World Food Security.

    3. Director-General of the Organization: appointed by the Conference for a term of six years and is re-elected, and has full power and authority to direct the work of the Organization; participate without vote in all meetings of the Conference and of the Council and shall them to examine the proposals for appropriate action in the field of problems within their competence.

    4. Departments: Department of Agriculture and Consumer Protection, Department of Economic and Social Development, Department of Natural Resources Management and Environment, Fisheries and Aquaculture Department, Forestry Department, Department of Technical Cooperation, Knowledge and Communication Department and the Department of Human Resources, Financial and Physical.

    5. Regional Offices: the principal function of the Regional Offices is the overall identification, planning and implementation of FAO's priority activities in the Region.

    6. Sub-Regional Offices: monitoring the level of programme implementation.

    7. Country Offices: Serve as the channel of FAO's services to governments and other partners (donors, NGOs, CSOs, research institutions, etc.).

    Since 1994, FAO has undergone the most significant restructuring since its founding to decentralize operations, streamline procedures and reduce costs. Highlights of the reforms include the transfer of staff from headquarters to the field, increased use of experts from developing countries and countries in transition and broadened links with the private sector and non-governmental organizations.


    Projects of the FAO field programme have two main funding sources:

    -The Organization's core budget ( also known as the Regular Programme which is funded by contributions from FAO Member Nations).

    -Extra-budgetary resources received from multilateral (e.g. mainly United Nations Development Programme -UNDP and other UN funds) and bilateral donors.

    Each FAO Member State pays annually its contribution to the budget Organization. The total FAO budget for 2012-13 is $ 2.4 billion. The 42% of the budget comes from contributions of member countries, while 58% through voluntary contributions from members and other partners. As for the research programs funded by FAO are more than 4,000, and include coordinated actions in different sectors: Agriculture (60%), Environment (12%), Nutrition and Feeding (11%), services (7%), Fisheries and Aquaculture (7%), Social (2%) and Forestry (1%).

    Moreover, the largest number of projects (47%) and funding (approximately 52.3%) were allocated to the African continent, followed by Central and South America (21.4% -10.4%), the Continent Asia and the Pacific area (20.6% -24.9%) and, finally, the Middle East (6.6% -8.7%) and Europe (4.4% -3.7% ).

    1 Cfr. Final Act of the United Nations Conference on Food and Agriculture, Hot Springs V A May 18 to June 3 1943,Washington; US Government printing of. 1943.


    D’ANDREA F. … PORCU F. (2011) Analisi dei progetti finanziati dalla Food and Agriculture Organization of the United Nations (FAO), Pomezia, Consiglio per la ricerca e sperimentazione in agricoltura

    FAO (2013) Basic texts of the Food and Agriculture Organization of the United Nations, Volumes I and II

    MARCHISIO S. … DI BLASE A. (1992) The Food and Agriculture Organization (FAO), Milano, Franco Angeli

    ROSIGNOLI R. … SILVAGGI C. (2009) La governance internazionale e il ruolo della FAO, Roma, Centro stampa Università La Sapienza

    UNITED NATION (2012) Basic Facts about the United Nations, Napoli, Editoriale Scientifica

    Editor: Giovanni AVERSA


    The foreign debt (or external debt) is the part of total debt held by creditors of foreign countries, i.e. non-residents of the debtor's country. This entry gives the total public and private debt owed to nonresidents repayable in internationally accepted currencies, goods, or services. These figures are calculated on an exchange rate basis, i.e., not in purchasing power parity (PPP) terms. The foreign debt is the portion of a country's debt that was borrowed from foreign lenders including commercial banks, governments or international financial institutions (International Monetary Fund …IMF or World Bank).

    There are different kinds of foreign debts:

    -From development cooperation: they are financed by rich countries; they have very low interest rates and constitute 47% of long-term debt;

    -From credit export: they are non-payment of imports by the debtor countries;

    -Commercial: they include more than 80% of short-term debt;

    -Multilateral: they are contracts with international financial institutions like the International Monetary Fund, the World Bank, the regional development banks.

    The main locations where we discuss the foreign debt are the IMF, the World Bank, the Paris Club and the London Club.

    Editor: Giovanni AVERSA



    Foreign debt overhang represents a major barrier to the growth of many developing countries. A high debt discourages investors to provide capital and binds the developing countries in a poverty trap ("Debt Overhang" effect). The foreign debt issue has been present since the early seventies, when oil shocks, high interest rates, industrialized countries recession and high trade deficits, led, as a natural consequence, to an increase in the requests for international lending by developing countries. After an initial period of static approach to the problem of foreign debt (see Structural Adjustment Program and "Baker Plan"), many of the restructuring initiatives, developed by the international financial institutions, took place with the idea that debt reduction could bring benefits both to the debtor and creditor countries (see Laffer's Curve). The nineties welcomed different initiatives such as the Heavily Indebted Poor Countries Initiative (HIPC) with the main aim to significantly reduce the debt owed by developing countries in the world.

    Foreign Debt and Sovereign Debt Restructuring

    A trade deficit in the balance of payments indicates that a country needs, for consumption and investment, more resources than those available and it should therefore, attract foreign capital. Later on, the country in question, could attract foreign direct investment (FDI) or provide debt issuance (bonds) to international institutions like International Monetary Fund (IMF) and the World Bank or to commercial banks or finally, to private entities. This kind of debt is generally defined as "foreign debt" and it is the part of total debt held by creditors of foreign countries, i.e. non-residents of the debtor's country. This entry gives the total public and private debt owed to non-residents repayable in internationally accepted currencies, goods, or services. These figures are calculated on an exchange rate basis, i.e., not in purchasing power parity (PPP) terms. The foreign debt is the portion of a country's debt that had been previously borrowed from foreign lenders including commercial banks, Governments or international financial institutions (International Monetary Fund …IMF or World Bank).

    While there is no universally accepted definition, a sovereign debt restructuring can be defined as an exchange of outstanding sovereign debt instruments, such as loans or bonds, for new debt instruments or cash through a legal process. Sovereign debt refers to debt issued or guaranteed by the Government of a sovereign State. The debt restructuring is based on agreements with the creditor countries on debt rescheduling, which can be defined as a lengthening of maturities of the old debt, possibly involving lower interest rates or the debt relief, which can be considered as a reduction in the nominal value of the old instruments.

    According to Stiglitz and Guzman (Creating a Framework for Sovereign Debt Restructuring that Works, 2016) sovereign lending markets are not working well. The current non-system for sovereign debt restructuring remains fraught with perverse incentives, which in turn lead to destructive and inequitable outcomes.The United Nations General Assembly approved in September 2015 nine principles that should guide sovereign debt restructuring processes. Their paper analyzes the usefulness of those principles and discusses how to move reforms forward.

    Debt Crisis in Developing Countries

    Since the end of World War I, the “rich” countries had been giving financial aids to the "poor" ones in order to increase their investments. Therefore, the debt of foreign countries cannot be considered as a recent issue. In the literature, the phenomenon generally dates back to the seventies, when the oil exporting countries had a large amount of currency resources used to grant loans for developing countries thanks to the international private banking system. The developing countries' economies dependent on exports, were directly affected by the energy crisis of 1973 and by the consequent lowering of commodity prices. Oil shocks, high interest rates, industrialized countries recession and high trade deficits, led, as a natural consequence, to an increase in the requests for international lending by developing countries. For developing countries, all these factors created a precarious macroeconomic situation. The situation aforementioned, represented the main concern of the international financial institutions in those years. These concerns became justified in 1982, when Mexico declared default (it was the first country ever) followed by Brazil. From the debt crisis of 1982-83, the international community developed important multilateral initiatives to reduce and cancel the foreign debt. Today, in addition to middle-income countries of Latin America, even the low-income countries, mostly located in Africa, are affected by the problem of the debt crisis.

    Loans and Conditionalities. The Structural Adjustment Plans (SAPs)

    In 1982, Mexico claimed not to be able to pay its debts and consequently, the IMF and World Bank entered in many commercial banks loans to allow new capital, preventing at the same time, a chain reaction. Mexico and other countries were “forced” to implement a series of reforms aimed at achieving the main objective which was the payment of debt through the Structural Adjustment Plans (SAPs). They were also known as the Washington Consensus, which was a set of "conditionalities" in order to receive new loans from the IMF or World Bank or to obtain lower interest rates on already existing loans. Through conditions, SAPs generally implemented "free market" programs and policy including internal changes (especially privatization and deregulation) as well as external ones, mainly the reduction of trade barriers. Countries that failed to enact these programs might be subject to severe fiscal discipline.

    SAPs were designed to improve a country's foreign investment situation by eliminating trade and investment regulations and boosting foreign exchange earnings with the promotion of exports, reducing Government deficits through cuts in spending. The "tips" of the Bretton Woods institutions were followed by many countries, from Latin America to Africa and Southeast Asia, without getting the desired results. In the second half of the eighties, the IMF itself, began to study a new strategy. Initially, deadlines were postponed and this was the only tool used to improve the situation of debtor countries (debt rescheduling); arrears payments were also refinanced. At the end of the eighties, it became quite obvious that the debt restructuring only led to an increase in the total debt, mostly due to the capitalization of interest. Creditors realized that not all debts could be repaid.

    Debt Reduction Initiatives

    “Baker Plan”. Together with the beginning of the Structural Adjustment Plans (SAPs), the IMF and World Bank, it was launched a more direct debt relief initiative: a plan developed by U.S. Treasury Secretary, James Baker in 1985 to relieve debt in the developing world. The Plan was designed to help highly indebted middle-income countries, i.e., those countries that were not extremely poor yet, but nevertheless they owed a large amount of money. This Plan suggested that the World Bank and private banks should have provided funding while developing countries were undertaking liberalizing structural reform. At the very end, the plan was not implemented because no consensus could be reached while considering which countries to be included. It was succeeded by the Brady Plan.

    “Brady Plan”. In 1989, the United States Treasury Department under the Treasury Secretary Nicholas F. Brady, formulated a new strategy for dealing with developing country debt. The Plan offered banks credit enhancements in exchange for their agreement to reduce claims. These credit enhancements were created at first by converting commercial bank loans into bonds (“Brady Bonds”), and then collateralizing principal and rolling interest payments on those bonds with US Treasury zeroes purchased with the proceeds of IMF and World Bank loans. The plan proposed that the IMF and the World Bank allocated resources to encourage the reduction of debt burdens and interest payments by debtor countries. Funds obtained from these organizations would have been used later on to enhance the credit worthiness of securities to be exchanged for commercial banks' existing loans.

    Heavily Indebted Poor Countries Initiative (HIPC). The expression Heavily Indebted Poor Countries refers to a group of 41 developing countries with high levels of poverty and debt overhang which were eligible for special assistance from the International Monetary Fund (IMF) and the World Bank. The Initiative envisaged comprehensive action by the international financial community, including multilateral institutions, to reduce to sustainable levels the external debt burden on HIPCs, provided they built a track record of strong policy performance. The Initiative’s debt-burden thresholds were adjusted downward, which enabled a broader group of countries to qualify for larger volumes of debt relief. It represented a significant step forward, as it placed debt relief in the framework of poverty reduction with the aim to ensure that essential restructuring and the development of a country were not compromised by servicing unsustainable debt burdens. The HIPC are also required to embark on clearly defined poverty reduction strategies.

    Why Reduce Debt. Debt Overhang Effect and the Laffer Curve

    A high Foreign debt increases the uncertainty about the chance that the debt stock will be fully repaid. In a macro-economic system, characterized by a certain degree of uncertainty, the foreign and domestic investors prefer to postpone their choices ("Debt Overhang effect"). Debt reduction can decrease the uncertainty (due to the default risk, to the deadlines renegotiation and the accumulation of arrears) improving allocative efficiency and expectations in Governments and policies of debtor countries. In fact, beyond a certain level, the debt overhang exerts negative pressures on the willingness of investors to provide capital. For this reason, the presence of a high stock of debt, according to the theory of "Debt Overhang", changes the incentives, both of the creditor and of the debtor and its reduction can interest both. According to some economists (Paul Krugman, Jeffrey Sachs and Peter Kenen) the debt Laffer curve (Fig. 1) reproduces the possibility of repayment as a function of the debt stock and clarifies how its reduction can be beneficial both for debtor and creditor:

    Fig.1 Laffer Curve

    The axis of ordinate represents the value of the debt resulting from the expected future payments; while the axis of abscissas describes the current nominal value of the debt (total debt stock). In the initial phase when the debt is substantially lower, the curve follows the 45 degree line.

    Point C shows the "Debt Overhang": the expected payments (per unit of additional debt) start becoming lower than the debt value as shown by the expected future payments which the developing countries are expected to be able to perform.

    In the point R, the curve begins to decrease because the present debt value increases and imposes such disincentives that the expected payments, for the additional loans, increase rather than decrease.

    Theoretically the best time to start a debt reduction is when the Country is beyond the point L and before the point R. This brings benefits both to the debtor and to the creditor because the debtor country will have less debt, but at the same time, the creditor will increase the value of their remaining debts.

    When the debtor country is located to the right of point R(the so-called "wrong" side of the Laffer Curve), a debt reduction increases the chances of repayment and improves the condition of the creditor and debtor. By contrast, a high debt discourages investment in physical and human capital, as well as the implementation of new technologies and structural reforms, mostly because the debtor country believes that all future profits will aim at repaying the debt contract. This “Debt Overhang effects” analysis shows how excessive debt can constrain developing countries in a poverty trap.

    Forum for Debt Restructuring. Paris Club and London Club

    Paris Club. The Paris Club is an informal group of official creditors whose role is to find coordinated and sustainable solutions to the payment difficulties faced by debtor countries. It is the major forum where creditor countries renegotiate official sector debts. A Paris Club “treatment” either refers to a reduction and/or renegotiation of a developing country’s Paris Club debts. The origin of the Club dates back to 1956 when Argentina agreed to meet its public creditors. It includes 19 permanent members and the major international creditor Governments. In December 2013, the Paris Club reached 429 agreements with 90 debtor countries. Since 1983, the total amount of debt covered by Paris Club agreements, rescheduled or reduced, is approximately about 573 billion dollars.

    London Club. The first meeting of the London Club took place in 1976 when commercial banks met to renegotiate Zaire's debt payment problems. There is no permanent London Club membership and it has no formal mandate. The Paris Club and the London Club are the two principal frameworks for restructuring (or, more practically, for rescheduling) sovereign debt. At a debtor nation’s request, a London Club meeting of its creditors may be held, the Club is subsequently dissolved after the restructuring. In the London Club, the interests of the creditor banks’ are represented by a steering committee composed of those banks with the greatest exposure to the debtor country in question.


    BERTHELEMY J. C. … LENSINK R. (1992) “An Assessment of the Brady Plan Agreements”, Technical papers Organisation for Economic Co-operation and Development, Ed. 67

    DI MAGLIANO R. … QUARTO A. … ZUPI M. (2003) Il debito estero nei paesi in via di sviluppo: problemi e prospettive, Torino, UTET Università (http://www.utetuniversita.it/catalogo/economia/il-debito-estero-nei-paesi-in-via-di-sviluppo-2420)

    IMF … WORLD BANK (1996) “The HIPC Debt Initiative-Elaboration of Key Faetures and Proposed Procedures”, IMF/WB, Washington DC, Agosto

    MINISTERO DEL TESORO, DEL BILANCIO E DELLA PROGRAMMAZIONE ECONOMICA (2000) “Relazione sull’attività delle banche e dei fondi di sviluppo multilaterali la partecipazione finanziaria e il ruolo dell’Italia per l’anno 1999”, Roma, Istituto Poligrafico e Zecca dello Stato (http://www.dt.tesoro.it/export/sites/sitodt/modules/documenti_it/rapporti_finanziari_internazionali/rapporti_finanziari_internazionali/banche_multilaterali_di_Sviluppo/relaz1-8.pdf)

    PRESBITERO A. (2010) Il Debito estero nei Paesi in via di Sviluppo, Novara, Università del Piemonte Orientale (http://utenti.dea.univpm.it/presbitero/POLEC/Note_debito%20estero.pdf)

    WORLD BANK (2012) “Global Development Finance 2012: External Debt of Developing Countries”, WB, Washington D.C.

    Editor: Giovanni AVERSA


    The productive internalisation is one of the main aspect of the globalisation process. The most important instrument of the this process are the Foreign Direct Investments (FDI).
    The Foreign Direct Investments (FDI) are international investments aimed at the acquisition of durable participations (control, on an equal basis or on a minority basis) in a foreign firm (M&A) or at creating a foreign branch (Greenfield investments) implying a certain degree of involvement of the investor in the direction and management of the created or acquired firm.
    It is widely agreed that multinational companies (MNCs) engage in FDI when three sets of determining factors simultaneously emerge: notably the presence of: i) ownership-specific competitive advantages, ii) location advantages in the host countries and iii) better trade benefits in intra-firm as against arm’s-length relationship between investor and recipient (internalisation advantage). This theoretical approach, introduced by Dunning (1977), is known as the OLI (Ownership, Location, Internalisation) framework.
    Ownership advantages pertain to products or production processes which other firms do not have access to, such as patents, or intangible elements, such as reputation for quality or brand names. Location advantages pertain to the host country’s quality of business environment, such as low factor prices or customer access, together with relatively low trade barriers or transport costs making FDI more profitable than exporting. Finally, internalisation advantages derive from the firm’s interest in maintaining its knowledge assets internal. This may happen for several reasons. For instance, markets for assets or production inputs (technology, knowledge, management) may involve significant transaction costs or time-lags.
    Starting from the OLI theoretical framework, the “new FDI theory” mainly refers to the ownership and location advantage, including MNC's in general equilibrium models. It should be stressed that, while the OLI framework is rather a normative theory, derived from the observation of the MNC’s behaviour in the localisation decision planning, the “new FDI theory” seems to be heuristically more adequate to an analysis in a theoretical model framework.
    In early literature (Helpman E. [1984], Helpman E. and Krugman P. [1985]) the presence of MNCs in a foreign country was explained in terms of differences in relative factor endowments among countries. Transport costs being null, the location of MNCs abroad is determined by the differences in endowments. The main shortcoming of this approach is that it seems suitable to explain “vertical” FDI (when firms locate different stages of production in different countries by taking advantage of differences in factor costs), but it cannot explain “horizontal” FDI (when firms locate similar types of production activities). The latter phenomenon has been observed among industrialised countries during the past few years. Thus, it seems that this approach cannot fully explain recent FDI trends.
    This conclusion leads us to a more recent literature, whose starting point (Brainard S.L. [1993]) is that multinational activities are driven by trade-offs between “proximity” and “concentration” advantages, rather than by differences in factor endowments.
    The proximity advantage stems from firm-level economies of scale, whereby any type of “knowledge capital” (like R&D activity) is transferable to the affiliates and allows MNCs to be closer to the foreign market. The concentration advantage derives from traditional plant-level economies of scale, which make it more profitable to concentrate production in one location and supply foreign markets by exports. Whenever the proximity advantage outweighs the concentration advantage, FDI flows arise. It is more likely to happen the higher are intangible assets relative to the fixed costs of opening up an affiliate, and the higher are transport costs.
    This model seems more suitable to explain horizontal FDI flows (i.e. FDI among industrialised countries). Markusen in several different works contributes to the theory endogenising multinational firms in general-equilibrium trade models and offering predictions about the relationship between affiliate production and parent-country and host-country characteristics. In particular, the knowledge-capital approach to the multinational enterprise identifies motives for both horizontal and vertical multinational activity and predicts how affiliate should be related to variables such as country sizes and relative-endowment differences.
    Vertical multinationals dominate when countries are very different in relative factor endowments; horizontal multinationals dominate when countries are similar in size and in relative endowments and trade costs are moderate to high. Investment liberalisation can lead to an increase in the volume of trade and produces a strong tendency toward factor-price equalisation: direct investment can be a complement to trade in both a volume of trade sense and in a welfare sense.
    Recent trends1. In 2008 and early 2009, global FDI flows declined following a period of uninterrupted growth from 2003 to 2007. Meanwhile, the share of developing and transition economies in global FDI flows surged to 43% in 2008. In 2008, FDI inflows to developed countries shrank by 29% compared with the previous year, while FDI inflows into developing countries were less affected than those into developed countries. FDI inflows into developing countries therefore increased in 2008 at 17%.
    Outflows of FDI from developed countries as a group declined in 2008, FDI outflows from developing countries rose by 3% in 2008,. Asian economies, especially China, continued to dominate as FDI sources. Thus in the first half of 2009, developing countries seemed better able to weather the global financial crisis, as their financial systems were less closely interlinked with the hard-hit banking systems of the United States and Europe.
    1Free on line databank on FDI is available at

    Badi H. Baltagi & Peter Egger & Michael Pfaffermayr, 2005. "Estimating Models of
    Complex FDI: Are There Third-Country Effects
    ?," Center for Policy Research Working Papers 73, Center for Policy Research, Maxwell School, Syracuse University Brainard S.L. (1993), “A Simply Theory of Multinational Corporation and Trade with a Trade-off between Proximity and Concentration”, NBER Working Paper n.4269, February.
    De Santis R. and C. Vicarelli (2001), “Fattori di attrazione degli investimenti diretti esteri nell’Unione Europea: il ruolo del contesto istituzionale e la competitività dell'Italia”, Rivista di Politica Economica, marzo.
    De Santis R. MC. Mercuri and C. Vicarelli (2003), “Taxes and location of foreign direct investments: An empirical analysis for the European Union countries”, Economia, Istituzioni e Società, n.1 gennaio-aprile.
    Dunning J. H. (1977), “Trade, Location of Economic Activity and MNE: A Search for an Eclectic Approach” in Olhin B., Hesselborn P. and P. Wijkman (eds.), International
    Allocation of Economic Actvity, London, Macmillan.
    Helpman E. (1984), “A Simply Theory of International Trade with Multinational
    Corporations”, Journal of Political Economy, 92, 31.
    Helpman E. and P. Krugman (1985), Market Structure and Foreign Trade, Cambridge Mass., MIT Press.
    Markusen J.R. (1995), “The boundaries of Multinational Enterprise and the Theory of
    International Trade”, Journal of Economic Perpective, vol.9, n.2, pp169-189.
    Markusen J.R. and K.E. Maskus (1999a), “Discriminating among Alternative Theories of the Multinational Enterprise”, NBER Working Paper No.7164, Washington D.C.
    Markusen J.R. and K.E. Maskus (1999b), “Multinational Firms: Reconciling Theory and Evidence”, NBER Working paper No.7163, Washington D.C.


    A forward is an agreement between two parties to buy or sell an asset at a certain future time for a certain price agreed today. It is a derivative contract traded OTC. The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position. The price agreed upon is called the delivery price, which is equal to the forward price at the time the contract is entered into.
    The difference between the spot and the forward price is the forward premium or forward discount, generally considered in the form of a profit, or loss, by the purchasing party.
    Forwards, like other derivative securities, can be used to hedge risk (typically currency or exchange rate risk), as a means of speculation, or to allow a party to take advantage of a quality of the underlying instrument, which is time-sensitive.
    A closely related contract is a futures contract; yet, they differ in certain respects. Forward contracts are very similar to futures contracts, except that they are not marked to market, exchange traded, or defined on standardized assets. Moreover, forwards typically have no interim partial settlements or "true-ups" in margin requirements like futures - such that the parties do not exchange additional property securing the party at gain, and the entire unrealized gain or loss builds up while the contract is open. A forward contract arrangement might call for the loss party to pledge collateral or additional collateral to better secure the party at gain.
    Editor: Chiara OLDANI
    © 2010 ASSONEBB

  • FREE BANKING (Encyclopaedia)


    “Free banking” is a system in which unregulated banks can issue currency and transferable deposits redeemable in a common base money. Based on historical episodes occurred before the establishment of modern central banks the theory of free-banking points to redeemability - hence to increasing marginal liquidity costs - as the discipline device against over-issue. Free banking is not only alternative to central banking but it also greatly diverges from the “fiat type” currency competition theories. The main predictions of the free banking model concern the correction of single banks over-issue and of in-concert expansion, the demand elasticity of currency supply and the independence of the stock of money from changes in the currency/deposit ratio.


    Free banking refers to the competing issue of redeemable currency notes (and transferable deposits) by unrestricted commercial banks. Historically free banking developed during the gold standard regimes so that paper notes issued by private banks were redeemable in gold or silver coins; such was the case for example of Scotland (1716-1844, Canada 1817-1914). In that setting the debate opposed the free issuance of banknotes redeemable into gold to the monopolization of issuance by a central bank. The modern theory of free banking advocates the bank issuance of banknotes and deposits redeemable in a common base money, which defines the unit of account and serves as the banking system ultimate means of settlements (Selgin and White, 1994).

    Theories of competitive money issuance

    Competitive money issuance as an alternative to central banking has been upheld by various theories. However there are striking differences among the models of currency competition which impinge on the very rules on which the monetary regimes rely. The main distinction is between models envisaging competition among fiat-type money and models resting on notes redeemability.

    A strand of money competition theories (Hayek 1978, 1990; Klein 1974) focuses on the decentralized supply of fiat-type money. In these models money issuance is not constrained by banks’ reserves. In Hayek the issuers produce fiat money under brand names which are legally protected and commit to a stable purchasing power of their money - which is not redeemable - in term of a basket of commodities. Competition for customers guarantee that the promise is enforced; whenever the currency loses purchasing power the issuer loses customers and is then obliged to curb issuance. Financial press would contribute to informing customers about the quality, i.e. the purchasing power, of money.

    Hayek’s model rely on the issuers’ reputation and credibility as a discipline device. However such a regime is not free from time consistency problem (see for example Taub, 1985) due to the impossibility of writing and enforcing a contract stipulating the future quantity of money to be issued.

    The competing money theories based on redeemability rest on reserve depletion in case of over-issuance as a discipline device. The free banking model falls in this group and it is based on the “direct” redemption of the currency into the base money; other models of currency competition advocate indirect redemption (Dowd, 1996; Greenfield and Yeager, 1983). According to the Greenfield and Yeager “indirect” convertibility model, unregulated financial institutions would issue notes and checking deposits denominated in a Unit defined on a bundle of good and services; however notes would be redeemable in some convenient redemption medium, like gold, in amount determined by the value, at market prices, of as many standard bundles as the Unit denominations of the banknotes and deposits being redeemed. In other works the unit of account would be different from the unit of redemption. In this way money supply would be determined by the demand side and monetary disequilibrium would be avoided.

    The free-banking model

    The assumptions

    The free-banking model has been formally developed by Selgin and White (1994) on the basis of historical episodes of unrestricted issue of currency redeemable in gold or silver by private competing banks. The model rests on the following assumptions: banks can offer any kind of financial instruments, included notes and deposits, free of statutory requirements and without entry barriers; notes issued by the various banks are distinct but equally redeemable at par in a common money, such as for example a frozen base of fiat base money; consumers have preferences over particular brands of notes. It is worth noticing that because of par redemption consumers’ preference for a particular brand does not imply accepting that note at a particular exchange rate; acceptance implies the decision to retain the favored notes in one’s asset portfolios while unwanted notes will be spent or deposited. In addition, the banks join a central clearing house where they redeem notes from competing banks.

    The assumptions of par acceptance and common clearing system deserve some discussions. Both institutions are related to the profit maximizing issuing banks so that their emergence has not only been a mere contingency during the historical episodes of free banking; they are predicted by the theory.

    At par notes acceptance and common clearing arrangements

    Par acceptance would emerge in a free banking system in a number of ways. First of all banks would gain from note changing activities because by swapping their own notes for other banks’ they would maintain a larger stock of their notes in circulation; par acceptance would then be the outcome of a competitive process by note changing banks. “Note dueling” strategies, i.e. the aggressive purchase of the notes issued by other banks followed by their sudden return for redemption, would occur causing each bank hold costly reserves to meet the aggressive demands for redemption by the other banks. In this scenario, mutual par acceptance would allow banks to economize on reserves. Par acceptance could also be established by pacts between banks recognizing the mutual gains in the marketability of their notes. System-wide notes par acceptance would imply also the emergence of a common clearing system allowing banks to reduce reserve holding (White, 1999).

    Limits to note issuance by a single bank

    On the basis of the above listed assumptions, the free banking theory predicts that there is a limit to the equilibrium quantity of the bank-issued notes. Increasing the volume of currency (or deposits) in circulation implies increasing the claims against the issuing bank and so the probability of adverse clearings. The banks’ reserves will shrink. Increasing marginal liquidity costs, i.e. the expected value of costs incurred if the bank runs out of reserves, limit the bank capacity to expand notes in circulation.

    The mechanism runs as follows. Assuming that the total demand for note balances for the single bank is given in the short run, any note issue which is not driven by an increase in the demand will causes an aggregate excess of currency supply. Notes in excess will be: i) directly redeemed; ii) deposited in another bank or in the issuing bank; iii) spent in transactions. Although the case of direct redemption is less frequent in mature systems where consumers tend not to hold reserve money, the deposit or spending channels will translate into claims against the issuing banks anyway - and into a loss of reserves.

    In case the excess currency is deposited in another bank the recipient will claim the notes for redemption at the clearinghouse; the return of the excess currency to the bank will decrease notes circulation immediately (reissuing excess notes will not profitable since it would entail further shrinking of reserves).

    On the other hand, if excess notes are spent they will be deposited in the bank by the recipient, say a retailer, exactly the way it happens with checks. The deposit accounts of retailers act then as a “note filtering device”; excess notes are deposited into other banks and finally enter the clearing systems (Selgin, 1988).

    The assumption of consumers preferences play a crucial role in the model, as it ensures that the expanding bank suffer adverse clearing after creating a note surplus; absent the assumption on note brand discrimination the notes issued by the bank which has caused excess of supply could not return to the issuing bank. It must be underlined that consumers preferences refer to the holding and not to the acceptance of notes in payment; the relevant assumption for the correction of over-issue is that consumers have brand preferences on which notes spend off and which notes hold when the find themselves hold more notes than desired.

    In-concert expansion

    If the risks of adverse clearing and reserve losses limits the profit-maximizing bank issuance, what about the possibility of notes expansion by the system as a whole? If all the banks in the system expanded currency supply the expected value of net adverse clearing would be zero. However, payments and reserves losses are stochastic; individual banks faced with sufficiently high short run reserve adjustments will then have a positive precautionary demand for reserve even if the expected value of net reserve losses is zero. Building on the literature on precautionary reserve demand dating back to Edgeworth (1888), Selgin (1994) assumes that the bank demand for reserves is proportional to the standard deviation of its reserve losses; in-concert expansion increases gross clearings and hence the risk of reserve depletion perceived by the banks. As the quantity of reserve in the system is limited the banks will cope with the risk of reserve losses by contracting their liabilities. A result of the free banking model is that a unique equilibrium volume in the system liabilities exists.

    Demand shifts

    The adequacy of note issuance by unrestricted banks is not a matter of supply but depends also on the demand side. Here again the demand for money refers to the desire to hold money balances and not just to receive money in exchange of goods and services (Selgin, 1988).

    A decrease in the demand for notes ceteris paribus brings about a situation of notes over-issue and will be corrected according to the above described process. Here again a rise in the demand for money can be a rise in the demand for the notes issued by a single bank or a generalized demand for notes holding.

    In the single bank case, an increase in the demand for notes issued by a bank means that the customers want to hold a larger quantity of a particular brand of notes. This translates into positive clearings for that bank, whose reserves are now greater than desired. Expanding notes issuance will return banks reserves to the desired level.

    In the case of generalized increase in the demand for notes, the increase in the amount of notes held by the public implies a decrease in the spending of notes, hence a decrease in gross clearings. The probability of reserve depletion for any given starting level of reserves also decreases implying that banks can expand their liabilities until reserves return to the desired level.

    In other words the model predicts that both the single bank and the overall notes supply are demand-elastic.

    Shifts between deposits and currency

    One distinguishing feature of the free-banking model refers to the consequences of a change in the currency-deposit ratio. If banks can issue both currency and deposit as liabilities changes in the currency-deposit ratio produce shifts from on type of liabilities into another without affecting the actual stock of bank reserves. If the marginal liquidity costs for currency and deposits is the same any change in the bank liability mix will not alter the desired reserve ratio. As a result the money multiplier is independent from the currency-deposit ratio. Conversely in conventional central banks regimes the currency-deposit ration alters the equilibrium quantity of money; if the public hold high powered money which constitutes also banks reserves, any attempt to draw currency from deposits will force banks to contract their balance-sheet absent a prompt and adequate base money injection by the central bank (Selgin, 1994).


    Dowd K (1996) Competition and finance. St Martin Press, New York

    Greenfield RL, Yeager LB (1983) A laissez-faire approach to money stability. Journal of Money, Credit and Banking 27:293-297

    Edgeworth FY (1888) The mathematical theory of banking. Journal of Royal Statistical Society 51:113-127

    Hayek FA (1978) The denationalization of money. Institute of Economic Affairs, London

    Hayek FA (1990) Denationalization of money: the argument refined. Institute of Economic Affairs, London

    Klein B (1974) The competitive supply of money. Journal of Money, Credit and Banking 6(4):423-453

    Selgin GA (1988) The theory of free banking: money supply under competitive note issue. Lanham. MD: Rowman & Littlefield

    Selgin GA (1994) Free banking and monetary control. Economic Journal 104:1449-1459

    Selgin GA, White LH (1990) How would the invisible hand handle money? Journal of Economic Literature, 32:1718-1749

    White L (1999) The theory of monetary institutions. Blackwell

    Taub B (1985) Private fiat money with many suppliers. Journal of Monetary Economics 16:195-208

    EDITOR Giuseppina Gianfreda

    University of Viterbo "La Tuscia"

  • Free Cash Flow per Share

    It is a synthetic indicator on the performance of a listed company, it is useful to make predictions about the future behaviour of the title, as well as to carry out assessments on the business. It is obtained from the ratio between cash flow (CF) generated in the accounting period and the number of shares on the market (NS). It represents a measure of the company's ability to meet its debts, reinvest in new business and pay dividends.


    AA.VV., Matematica Finanziaria, Monduzzi Editore, 1998

    Abate G., Gli indici del mercato azionario. La misurazione dell'efficienza, EGEA, 2013

    Editor: Giuliano DI TOMMASO


    Frictional unemployment depends on the duration and the imperfection of the matching process between vacancies and workers searching for a better job. Such a mismatch can be related to many factors. Among others, it can depend on personal skills, remuneration, work-time, and location. The rate of frictional unemployment depends on the frequency and the period of time spent by workers in switching from one job to another. It follows that frictional unemployment is a short-term variable that can be reduced but not totally eliminated via the implementation of structural policies aimed at reducing the inefficiencies and the obstacles to the free functioning of the labour market, as well as the introduction of more efficient services providing a better allocation of resources (i.e. employment offices).

    Editor: Bianca GIANNINI
    © 2011 ASSONEB


    A transaction for a person’s own benefit, on the basis of and ahead of an order which he is to carry out with or for another, which takes advantage of the anticipated impact of the order on the market price. A form of market abuse (insider dealing) under the FSA’s Code of Market Conduct.

    ©2012 Editor: Camera dei Lords

  • FSA

    Financial Services Authority.

    ©2012 Editor: Camera dei Lords

  • FUTURE (Encyclopedia)

    Financial futures are contracts in which the two parties agree on purchasing a pre-determined quantity of an asset at a pre-defined price. They are standardised (expiration, underlying asset, settlement method) and are traded on stock exchanges. They are traded by means of the Clearing House and therefore the counterparty risk is eliminated. From an economic point of view, derivatives can be used to hedge, speculate and arbitrage. Futures are widely used to hedge core business risks: an example is a foreign exchange contract where the buyer, a European exporter, can hedge the euro-dollar exchange rate by buying futures on the euro-dollar exchange rate. Futures are considered to be an efficient financial instrument to hedge. Speculation usually refers to a purchase that does not correspond to any underlying asset in the portfolio. Arbitrage means that operators look for mis-priced contracts, between spot and derivatives markets, and try to exploit the differential in prices at their favour.
    The standard formula to price a financial future, in the absence of arbitrage and with constant interest rates, is:
    F: future price; S: spot price of the underlying asset; e: exponential function; r: risk-free interest rate (constant from the underwriting of the contract to its expiration); t: expiration of the contract (length).
    Functions of futures are the same of derivatives.
    In Italy, they are traded on the MIF and IDEM.

    1. Origin.

    The first futures contracts were traded in ancient Mesopotamia, on agricultural commodities (corn, wheat). The trading took place at the temple, and the priests played the clearinghouse function. More recently, derivatives and futures spread in Northern Europe (16th and 17th century), and after the first half of 17th century in the USA.
    Financial futures appeared in 1972 on the Chicago Mercantile Exchange (CME), in the form of foreign exchange futures, together with the settlement of the International monetary market-IMM. The first future on interest rate appeared in 1975 at the Chicago Board of Trade (CBOT). In Europe, futures have been traded on the London Stock Exchange since 1982, and today this market is the second biggest after the CBOT. The most developed and deepest stock exchange for derivatives is the one in Chicago: it is named Chicago Board of Trade (CBOT) and it trades commodities (wheat, corn, soy, orange juice, and many others). With regard to financial assets, the Chicago Board Option Exchange (CBOE) and the New York Stock Exchange are the biggest markets. The high level of standardisation makes futures contracts liquid, tradable and marketable.

    2. Types of futures.

    Futures are traded on stock exchanges worldwide, and are written on commodities, financial securities, probabilities and events.

    2.a) Commodity futures.

    They can be traded on every commodity, industrial or not. For agricultural goods and precious metals, this market is very important. For energy goods (e.g. oil), it should be a relevant indicator of future spot prices; however, during 2007-09, this forecasting ability dramatically diminished.

    The share of futures traded OTC is very high.

    2.b) Financial futures.

    They are written on any type of financial security, like currencies, interest rates, stock indices, shares, bonds, Treasury Bonds and Bills.

    2.c) Event Futures.

    They bet on the probability of an event like the default of a creditor (Credit Default), or on the weather (rain or not) which directly influences the agricultural activity.

    3. Trading.

    It takes place by means of a broker that operates through the clearing house (CH). Buyers and sellers never meet, but the CH guarantees all transactions. At the writing of the contracts, the parties pay an initial margin, between 2% and 10% of the nominal value of the contract. At end of every trading day, a maintenance margin should be paid to eliminate the counterparty risk.
    Hull J. (2008) Options, futures and other derivatives, Prentice Hall.
    Oldani C. (2008) Governing Global Derivatives, Ashgate, London.
    Editor: Chiara OLDANI
    © 2010 ASSONEBB

Selected letter: F English version

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