FINANCIAL ENGINEERING

MEANING
Corporate finance,bank finance,and investment
finance have changed in recent years has given
birth to a new discipline that has come to known
as financial engineering.
Financial engineering involves the design,the
development,and the implimentation of
innovatives financial instruments and
processes,and the formulation of creatives
solution to problem in finance

For many firms, their risk exposure is

unique in the sense that the risk exposure
is based on an asset whose value is not
easily hedged.
By combining elements of forwards, futures,
options, and swaps, firms can create a
financial instrument that meets the needs
of the corporation that is trying to hedge
its risk exposure or one that offers the
institutional investor an investment
opportunity with a unique payoff
structure.

DEFINITION
INVESTOPEDIA EXPLAIN'
Financial engineers use various mathematical
tools in order to create new investment
strategies. The new products created by financial
engineers can serve as solutions to problemsor
as ways to maximize returns from potential
investment opportunities.
Financial engineering, at least for our purposes
here, can be defined as the process of using the
principles of financial economics to design and
price financial instruments

ADVANTANGES
Return on investment frequency of return, rate
of return, mode of return.
Safetygrade assigned by rating agencies,
security, potentiality of investment.
Volatility of volume, volatility of price.
Liquidity.
Convenience of investing.
Tax aspects.
Investment period.
Financing source.
Securitization scope (to pledge, and/or to
raise funds on investments).

TOOLS
(1).CONCCEPTUL TOOL.
(2)PHYSICAL TOOL.

CONCEPTUAL TOOL
It involve the idea and concept which underlie
finance as a formal discipline.these tools are
taught as a part of modern finance cirricula in
graduate-level business programs.
Eg:
valuation of theory,portfoliotheory,hedging
theory,accounting relationship.

PHYSICAL TOOL
The financial engineer include the instrument
and the processes which can be pieced together to
accomblish specific purpose.
This include
securities,equities,futures,options,swaps,and
dozens of variants on these basic themes

FINANCIAL ENGINEERING VS
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS

The person
engaged in the
practices
financial
analysis.
Formulating and
implimenting
new instrument.

FINANCIAL
ENGINEERING

The person engaged

in the practice for
finacialengineering
The process or
method studying the
nature of something
inoder to determine
its essential features
and their
relationships

FINANCIAL ENGINEERING TEAM

Financial engineers often work as a part of a larger
team. The elements of the team will very
depending on the nature of the engineering
involved.
Team members:
Accountant,
Tax specialist,underwriters,compliance
officers,traders,financial
analysist,programmers,information service
personnel

The important point to remember is that

financial engineer does not usually work alone.
All the member of the team are carefully selected
work together efficently and with the speed
required by the solution.communication is the
key.

FACTORS CONTRIBUTING TO THE

GROWTH OF FIANCIAL ENGINEERING

(1)ENVIRONMENTAL FACTORS
It may be regarded as the factors
external to the firm and over which the firm has
no direct control but which are nevertheless of
great concern to the because they impact the
firms performance.

It include:
price volatility
tax asymmetries
technological advances
regulatory change&
increased competition

INTRAFIRM FACTORS

The factors that we have considered thus far have

all contributed in their own way to the rapid
growth in fiancial engineering activity.

It includes:

liquidity needs
risk aversion
agency cost
accounting policies.