CFA® glossary: F

46 terms beginning with F.

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F-statistic

A test statistic that is a ratio of two variances. In regression, explained variation per slope over residual variation per degree of freedom, (RSS ÷ k) ÷ [SSE ÷ (n − k − 1)], testing whether all the slopes are zero. Where it appears →

F1 score

The harmonic mean of precision and recall, 2 × precision × recall ÷ (precision + recall). More informative than accuracy when one class is much rarer than the other.

Face value

The amount repaid at maturity, and the figure the coupon rate is applied to. Almost never the price actually paid. Where it appears →

Factor risk premium

The expected return above the risk-free rate on a portfolio with a sensitivity of one to a factor and zero to all others. Times an asset's sensitivity, it gives that factor's share of expected return.

Fair dealing

Giving every entitled client a fair opportunity to act on a recommendation, so none is systematically served first. It does not mean treating everyone identically — different service levels are allowed if disclosed. Where it appears →

Fair value

The price something would fetch in an orderly transaction today, ranked by how observable the inputs are — from a quoted price down to a firm's own model. Where it appears →

Fairness opinion

An adviser's view, given to a board, on whether the price in a proposed transaction is fair to the shareholders asked to accept it. It rests on an independent valuation of the company.

Family office

An organisation that runs a wealthy family's affairs: investments, tax, estate planning and administration. A single family office serves one family at high cost; a multi-family office shares the cost across several. Where it appears →

Fat tails

A distribution putting more probability on extreme outcomes than the normal does, which is positive excess kurtosis. Risk measures that assume normality then understate how often large losses occur. Where it appears →

Fifo

First in, first out: the oldest costs go to cost of goods sold and the newest stay in inventory. With prices rising it reports lower expense, higher profit and inventory closer to current cost. Where it appears →

Finance lease

A lease reported with amortisation and interest separately, which front-loads the total expense relative to a single straight-line charge. Where it appears →

Financial account

The part of the balance of payments recording cross-border purchases and sales of financial assets. It is how a current account deficit is paid for, so the two offset.

Financial engineering

In private equity, raising returns through the capital structure — chiefly adding debt and repaying it from the company's cash — rather than by improving the business. It magnifies losses as readily as gains.

Financial leverage

Fixed financing costs, chiefly interest, magnifying what a change in operating profit does to net income — in both directions. Where it appears →

Financial reporting

Producing statements and disclosures about a company's performance, position and cash flows for outside users, within the rules of an accounting standard and the choices it leaves to management. Where it appears →

Financial statement analysis

Using financial statements with other information to judge a company's performance and position and reach a decision, such as whether to invest or lend. It begins where reporting stops.

Fintech

Technology applied to the design and delivery of financial services. For an analyst the parts that matter are big data, the techniques that analyse it, automated trading and automated advice.

Five forces

Porter's framework for industry profitability: the threat of entrants, the threat of substitutes, buyer power, supplier power and rivalry. The weaker they are, the more of the value it creates an industry keeps. Where it appears →

Flight to quality

A move by investors out of riskier assets into the safest government bonds in times of stress. Government yields fall while credit spreads widen. Where it appears →

Floating-rate note

A bond whose coupon resets to a reference rate plus a fixed margin. Resets remove nearly all the rate risk and none of the credit risk. Where it appears →

Flotation costs

Fees and expenses of issuing new securities, mainly underwriting. They make new equity dearer than retained earnings, one reason firms avoid paying dividends and then raising equity.

Forced heirship

Rules in some jurisdictions, often civil-law ones, that reserve fixed shares of an estate for children or a spouse whatever the will says.

Foreign currency debt

Debt in a currency the borrower cannot issue, so it must be serviced from export earnings or reserves. The reason a sovereign's foreign currency rating is usually below its local one. Where it appears →

Forward commitment

A derivative obliging both parties to transact on terms agreed today — forwards, futures and swaps. Neither side can walk away, which is what separates it from an option. Where it appears →

Forward curve

The rates implied today for borrowing over future periods. Each is a breakeven between two strategies you can transact now, not a forecast.

Forward p/e

A multiple using forecast earnings for the year ahead. More relevant to value than the trailing version, and only as reliable as the forecast underneath it. Where it appears →

Forward points

The forward exchange rate minus the spot rate, usually quoted in pips and scaled before being added to spot. Positive when the base currency trades at a forward premium, which reflects the interest rate differential. Where it appears →

Forward premium

A forward exchange rate above spot, meaning the base currency costs more for later delivery; below spot it is a forward discount. It reflects the interest rate differential, not a forecast. Where it appears →

Forward price

The price agreed today for delivery at a future date, set so the contract is worth nothing at the start. It follows from the cost of carrying the asset to delivery and is not a forecast of the spot price. Where it appears →

Forward rate

The rate at which locking money away for longer ties exactly with rolling a shorter position. A breakeven computed from today's prices, not a prediction. Where it appears →

Forward rate agreement

A contract fixing today the interest rate on a notional amount for a future period, settled in cash on the gap between that rate and the reference rate when it is set. Its fixed rate is a forward rate implied by spot rates. Where it appears →

Forward rate parity

The claim that the forward exchange rate is an unbiased forecast of the future spot rate. It holds only if covered and uncovered interest parity both hold. Where it appears →

Free cash flow

Cash from operations after the investment needed to keep the business going. What is genuinely available to the people who funded it. Where it appears →

Free cash flow to equity

Cash flow from operations less investment in fixed capital, plus net borrowing: what is left for shareholders after operating needs, investment and payments to lenders. Discounted at the cost of equity. Where it appears →

Free cash flow to the firm

Cash available to all capital providers after operating expenses, taxes and investment in fixed and working capital. Discounted at the WACC it values the whole firm; debt is then deducted to reach equity. Where it appears →

Free trade area

A bloc whose members remove trade barriers among themselves while each keeps its own tariffs on outsiders. The shallowest step of regional integration.

Front-running

Trading ahead of a client's order to profit from the price it will move. The reason firms impose blackout periods rather than rely on restraint.

Fulcrum fee

A symmetrical performance fee around a base fee earned for matching the benchmark: it rises with outperformance and falls by the same proportion with underperformance.

Fulcrum security

In a restructuring, the most senior claim that will not be repaid in full and so is likely to receive the reorganised company's equity. Distressed investors buy it for influence over the outcome and the upside. Where it appears →

Full and fair disclosure

Disclosure made prominently, in plain language and effectively, so the reader understands the conflict and how it has been mitigated. A buried footnote does not qualify, and disclosing never excuses what another Standard forbids. Where it appears →

Full goodwill

Goodwill with the non-controlling interest measured at fair value, so it covers the whole subsidiary. Partial goodwill measures that interest at its share of net assets and covers only the parent's part. Where it appears →

Full replication

Holding every index constituent at its index weight. It keeps tracking error low, but becomes costly for indexes with many small or illiquid holdings, where sampling or optimisation is used instead. Where it appears →

Functional currency

The currency of the primary economic environment in which an entity operates, judged by the currency of its sales prices, costs and financing. It decides which translation method applies. Where it appears →

Fundamental law of active management

The result that expected information ratio ≈ transfer coefficient × information coefficient × √breadth: skill, times how many independent bets, scaled by how fully they reach the portfolio. Where it appears →

Funded status

Pension plan assets minus the pension obligation. A deficit is shown as a net liability and a surplus as a net asset, though the asset recognised may be capped. Where it appears →

Future value

What an amount invested today grows to after a stated number of periods at a given rate per period, with interest earning interest along the way. Where it appears →