HowPower

ful
IsFi
nanci
alEngi
neer
ingToTheBanki
ngWor
ld.

I
ntr
oduct
ion

Thebankingsect orisconsi
deredasoneoft hemosti mport
anteconomicsector
sandi sthe
mostseduct i
veandi nfl
uent
ialoneinthegrowt hofeconomiesofcountri
es.Technological
i
nnov at
ionsaffectthefi
nancialperf
ormanceofbankst hr
oughthei
rabil
it
ytoincreasetheir
profi
tsandreducet hei
rcosts.Thisissupportedbywhof oundthattheuseofinvestment
st
r at
egi
esinpr i
vatecommer cialbanksinelectroni
cservi
cestoappearonasmal lscale,
i
nef f
ect
iveinmeet i
nggoodenv i
ronmentforgr owth.

Recentl
y,t
heentr
yofnon-bankinginst
it
utionsint
ot hefiel
doff i
nanci
alworkhasbeenobser
ved
i
ncreasi
ngcompet i
ti
onandforcingfi
nancialandbankingi nst
it
uti
onstoprovi
dea
comprehensiv
erangeoffi
nancialandbankingservices,andthusincr
easingthef
unct
ionsof
commer ci
alandi
nvestmentbanks.Anewt ypeofbankshasal soemer gedknownas
comprehensiv
ebanks,whi
chuset echnologyoffinancialengi
neeri
ng.

Whati
sfi
nanci
alEngi
neer
ing?

fi
nancearechallengedtodaybycomplexfi
nanci
al andglobal systemsandbydynamicall
y
changi
ngregulatoryenvir
onmentsandpoli
ti
cs.Awor ldintransiti
oncreat
esbothopport
unit
ies
andchall
engesf orexpert
swhocant ur
ntheoret
icalandfinancialconstr
uctsi
ntopr
ofit
ableand
i
nnovati
ve,custom-designedi
nstr
umentsinthemar ketpl
ace.

Fi
nancialengineeri
ngisar elat
ivel
ynewf i
eldofstudy.Vari
ousfields,suchaseconomi cs,
mathemat i
cs,comput erscience,andf i
nancial
theoryareintegr
atedandut i
li
sedtodevelop
al
gorit
hmi corarti
fici
ali
ntell
igencet r
adingprogrammest hatareusedi nt hefi
nanci
almar ket
s.
Manyar eas,i
ncludingcorporatefinance,r
iskmanagement ,
andder iv
ativesproduct
s,use
fi
nanci
al engi
neering.

Fi
nancial engineeringi sthephenomenonofpr oductand/orprocessi nnovati
onint hefinancial
i
ndustriesthedev elopmentofnewf i
nanciali
nst
rumentsandpr ocessesthatwi l
lenhance
shareholders',i
ssuer s'orinter
mediari
es.I
tisadevelopmentpr ocessbasedont her ol
epl ay
ed
bytheact ivati
onofgl obalstockexchanges,aswellasnewi nnovati
onsi ninvest
ment
i
nsti
tutionsi ngener al,i
naddi ti
ontheimpactofstr
ategi
cthinkinginthef i
nancialbanking
i
nsti
tutionsandt heappear anceofemergingmarketsandfinancialcenters.

Thedesign, implementcreat
ivet
ool sandi nnovat
ivecreati
vesoluti
onstofi
nanci
alpr
oblems.
Thisdefinit
ionindicat
esthefi
nancialengineeri
nginvolvestypesofacti
vi
ti
esTechnol
ogical
i
nnovationsr epresent
edbymobi l
et echnologybankingservicesandATM.Orinnovat
ionsofnew
fi
nancialinstrumentssuchascreditcard.
.Ty
pesofFi
nanci
alEngi
neer
ing

Trade-
inDeri
vati
ves:Whi
lefinanci
alengineer
ingut
il
izessi
mulati
onsandanal
yti
csf
ornew
fi
nanci
alprocesses,
theareaalsodevelopsnewway stohelpbusi
nessesopt
imi
zeEar
nings.

Specul
ation: Speculati
vevehicl
eshav ealsobeenpr oducedinthefi
eldoff i
nancialengi
neeri
ng.
Forexampl e,duringthestartofthe1990s, i
nstrument ssuchast heCredi
tDef aultSwap(CDS)
wereestablishedt ocoverinsuranceforbondf ail
uressuchasmuni ci
palBonds.These
deri
vati
vecont ractshav ebroughttheatt
entionofi nvestmentbanksandspecul atorstothefact
that
,bywager i
ngwi ththem, t
heymaymakemoneyf rom CDS'monthlypremiums.

Fact
orsofFi
nanci
alEngi
neer
ing

1InvestmentStrategies:Asetofr ules,polici
esandpr oceduresthatareformulatedbyt he
concernedauthoriti
estogui dethesel ecti
onofmostappr opriat
einvestment,whichachievesa
bal
ancebet weenr eturnandr i
sks,aswel l
asbenefitfrom investmentopportunit
ies,andthe
abi
li
tytoachievethegoal ofaddingv aluetotheinstit
uti
ont hroughinvest
ment .Financi
al
engenderi
ngleadt oi nvest
mentst rategiesandimpr oveinsti
tuti
onsbyencour aget he
opportuni
tyofinvestmentt ovaluef orimplementthei nvestmentstrategi
esinthel ongterm.

2Technol ogical I
nnovations( TI)
:Agr oupofi deas, orasetofproduct s,
systemsandmoder n
technologythatcombi necr eati
vit
yandi nnovati
ont hebanki
ngi ndustry’
stechnol
ogical
i
nnov ati
onsasr epresentedbyATM, e-banking,e-tr
ansfermoney ,onli
nebanking,andopen
account sonli
neandmobi lebankingt echnique.Thet echnol
ogical i
nnovati
onsconcept s,
techniques,polici
esandi mplement ati
onst rategiestobankingserviceshasbecomeasubj ect
offundament alimportanceandconcer nstoal lBanksandindeedapr er
equisi
teforlocaland
globalcompet i
ti
venessBanki ng.

.
3Pr ocessI nnovati
on(PI):Processi nnovati
oni sthecreationofnewf i
nancial
instr
umentsthat
willdiversifyfi
nancial
toolsandt heirmeansofdel iv
eryinor dertoachievetheeffi
ciencyof
banki ngpr oductsanddev elopthem t osuitthediversefinancialandrenewableneeds.It
determi nessol ut
ionstothepr obl
emsoff inancing,i
nor dertor educecostsandincreaseprof
it
s,
faci
litatemor ecompetit
iveness;prov i
demor eservi
cest hatarelessexpensivebutmor equal
it
y,
thusat tractingmorecustomer s,accesst othel ar
gestnumberofmar ketsexpected.

Adv
ant
agesofFi
nanci
alEngi
neer
ing

Withthehelpofthetechniquesthatcomprisemathematicalmodel i
ngandcomputer
engineer
ing,
onecant est,
analyze,f
indnewappr oachesandt ool
sf ori
nvest
mentanal
ysi
s,debt
str
ucturi
ng,i
nvestmentopt i
ons,t
radingst
rategi
es,fi
nancial
model s,et
c.

Anyfuturedateevent
ssuchascontr
actsorinv
estmentshavehighri
skinv
olv
edduetothei
r
uncer
tainty
.Insuchcases,
Ithel
pscorpor
atesreducer
iski
ninvestment
sorcont
ract
sinvol
vi
ng
f
utur
edeli
ver
yofser
vicesorcommodi
tyf
utur
eswi
thi
tscal
cul
ati
ont
echni
quesf
orf
utur
e
r
etur
ns.

Thisconcepti
st oanalyzethewor t
hofeachbalancesheetandpr of
itandl
ossaccounti
tem f
or
thefutur
ebenefitofthebusiness.Thi
scanhelpcorporat
ionscleanupadversei
temsandfocus
mor eonprofi
tablei
tems.Theseact i
vi
ti
esalsoresul
tinbettert
axassessmentsforf
ir
ms.

HowdoesFi
nanci
alEngi
neer
ingWor
ks?

TheFi nanci
alSectori
salway sprovi
dinginvestorsandorganizat
ionswithnewandcr eati
ve
I
nv esti
ngtool
sandsol uti
ons.Mostoft heit
emswer edevelopedthroughfi
nancial
engi neeri
ng
toolsandtechni
ques.Financi
al engi
neerscantestandpr oducenewi nstr
umentswi ththeuseof
mat hemati
calmodelli
ngandcomput ersci
ence, suchasnewt echniquesofi
nvestmentanal ysi
s,
newi nvest
ments,newdebtof feri
ngs,newfinancialmodels,newbusinessstr
ategies,etc.

Financi
al engineer
susequant i
tati
veriskmodel stoest i
matehowani nvestmenttool perf
orms
andwhet hernewf i
nancial-
sectorservicesofferi
ngswi l
lbesustainableandcost-eff
icientasper
thecurrentMar ketvolati
li
ty.Theseengi neersoperateinconjunct
ionwi t
hinsurance,asset
management ,hedgef unds,andbanks.Theyoper ateintheseorganizati
onsinproprietary
business,ri
skmanagement ,port
fol
iomanagement ,
derivat
ivesandpr i
cingofoptions,
struct
uredpr oducts,anddepar t
ment sf orcorpor
atefinance.

Financialengi
neerscreate,desi
gn, andimplementnewf i
nancialmodelsandpr ocessesinorder
tofindsoluti
onsforproblems.Theyal waysseeknewf inancialopport
unit
ies.Prepari
ngsuch
model srequir
esagr eatdealofr esearchandtheyrelyonin-depthdataanal y
sis,si
mulati
ons,
ri
skanal ysi
s,andstochasti
cs.Financialengineerspossessknowl edgeinfiel
dssuchas
economi cs,st
ati
sti
cs,andcor por at
efinance.Theseengineerswor kinbanking,consul
ti
ng
agencies,securi
ti
es,andf i
nancial management .

Fact
orsI
nfl
uenci
ngFi
nanci
alEngi
neer
ing

Thef
oll
owi
ngar
ethef
act
orst
hati
nfl
uencet
hegr
owt
hpr
ocessoff
inanci
alengi
neer
ing:

Env
ironment
alFact
ors

Thesearethefactorsthatexi
stintheexternal
envir
onment.Envir
onment alfactor
shav eadir
ect
i
mpactont hefir
m. Thesefactorsarenotcontr
oll
abl
e.Poli
ti
cal,
Economi c,Social,
and
Technol
ogical(
PEST)anal ysi
scanbeconduct edtodeterminethesefactorsandt hei
rimpacton
thebusi
ness.Commonexampl esofenvir
onmentalfact
orsaretechnologicaladvancements,
newinvent
ions,compet i
ti
veness,andpoli
ti
calandeconomicchanges.

I
ntr
aFi
rm Fact
ors

Thesef
act
orsar
econtr
oll
abl
ebythef
ir
m anddir
ect
lyaffectt
hefinanci
alengi
neer
ingpr
ocess.
Exampl
esofi
ntr
a-f
ir
mfactor
sar
eaccount
ingpol
ici
es,r
iskaversi
on,agencycost
s,andl
iqui
dit
y
needs.

I
mpor
tanceofFi
nanci
alEngi
neer
ingt
otheBanki
ngwor
ld.

Financial engineeringi st hephenomenonofpr oductand/ orprocessi nnov at

ioni nt hef i
nancial
i
ndust riesthedev elopmentofnewf i
nanci al i
nst r
ument sandpr ocessest hatwi l
l enhance
shar eholders',i
ssuer s' orintermedi ari
es.itisadev elopmentpr ocessbasedont her ol
epl ayed
byt heact ivati
onofgl obal toexchanges, aswel lasnewi nnovat ionsi ninvestmenti nst i
tuti
onsin
gener al,i
naddi ti
ont hei mpactofst rategict hinkingint hef i
nanci al bankinginstitutionsandt he
appear anceofemer gingmar ketsandf i
nanci alcenters.i
tisdesi gn, i
mplementcr eativ
et ools
andi nnov ativ
ecr eat i
v esol uti
onst of i
nanci al probl
ems.Thi sdef ini t
ionindicatest hef inancial
engineer i
ngi nvolvest ypesofact i
viti
esTechnol ogicalinnov at
ionsr epresentedbymobi le
technol ogybanki ngser v i
cesandATM.Ori nnov ati
onsofnewf i
nanci ali
nstrument ssuchas
creditcar d.
Thebanki ngsect ori nIraqisst il
l sufferi
ngf rom weakuseofmoder nt echnol ogiesin
i
tswor k.Ast echnol ogi calprogr essinoneoft hemosti mpor t
antf actorsfort hegr owt hofbanks,
i
thel psbankst opr ov ideser vicesfasterandatal owercost sandhi gherquality.Iraqibanksar e
stil
ldoingmostoft heoper ati
onsandbanki ngser vicesmanual ly, suchas, disbur sementand
receiptofmoney ,openi ngbankaccount s,andcommuni cat
ionwi thcust omer s.Consequent l
y,
citi
zen’saccessofcashhol i
day swasdi fficul tbecauseoft hef ailuret oadoptt heATM . I
raqi
banksar esmal l-
sizedcompar edt ootherbanksi nAr abori nternat ionalmar kets.

financiali
nsti
tut
ionsareobligedt
oapplyfi
nancial
engineer
ingtocr
eateinnov
ati
vepr
oductl
ine.
Thisway ,fi
nanci
alinst
it
utionscansust
ainthei
rrel
evanceinthemarket
placewhi
leal
sogai
ning
considerabl
emar ketshare.

Concl
usi
on

Fi
nancialengineeri
ngcanbenefi
torganizat
ionsi
nf i
ndingsol
uti
onstovari
ousprobl
emssuchas
ri
skmanagement ,scenar
iosi
mulati
on,andnewpr oductdevel
opment.Howeverowingtothe
ever
-i
ncreasingfinanci
ali
nnovat
ion,t
hereisaperpetualdemandforhi
ghlyski
l
ledfi
nancial
engi
neers.

Thi
scanassistpeopleinevaluati
ngandanal ysi
ngtheirentir
epor tfoli
ori
sksandreturns.
Str
ategi
est
ol owerthetotalr
isktotheleastpossibl
elev elcanbedr awnupusingthisanal
ysi
s.
I
tcanalsobeappliedinseveraldomains,suchaspr i
ceder ivat
ives,corpor
atefi
nance,
managementofpor t
fol
ios,f
inancial
regulat
ion,opti
onv aluati
on,riskmanagement.