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INTRODUCTION TO
FINANCIAL
ENGINEERING

Introduction
What is Finance?
What is Financial Engineering?

What is Finance
Finance is about the bottom line of business

activities
Every business is a process of acquiring and
disposing assets
Real asset tangible and intangible
Financial assets

Objectives of business
Valuation of assets
Management of assets
Valuation is the central issue of finance

Money vs. Finance

Monetary Economics

vs.

Financial Economics

Money / Credit
Creation
Money &
Banking
Central
Bank

Return / Risk
Allocation

International
Finance

Money
Control

Corporate
Finance

Commercial
Banking

Investments
(Capital
Markets)

Non-Bank
Financial
Liquidity Sector

What is Finance?
Money & Banking

Monetary Economics

International Finance

International Economics

Multinational
Corporate
Finance

Corporate
Finance

Financial
Engineering

International
Financial
Market

Capital Market
(Investments)

Financial
Economics

Unifying Principles of Finance

No arbitrage
Preference
Optimization
Market in equilibrium

Principle of Financial Engineering

No arbitrage
Market in

equilibrium

Preference
Optimization

Principles of Financial

Engineering
Principles of Finance

FINANCE

F.E.
I.T.

ENGINEERING

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Why Financial Engineering Emerging?

The pace with which corporate finance, bank finance, and

investment finance have changed in recent years has

given birth to a new discipline that has come to be known
as financial engineering.
As with most disciplines in their early stages of
development, the field of financial engineering has
attracted people with an assortment of backgrounds and
perspectives.
The term financial engineering means different things to
different people like commercial bankers, investment
bankers, corporate treasurers, corporate recruiters,
financial engineers, financial analysts, and others.

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About Financial Engineering?

The field is not yet very well defined
New Field
Involves the design, the development, & the implementation

of innovative financial instruments & processes.

Refers to the application of various mathematical, statistical
and computational techniques to solve practical problems in
finance.
Such problems include the valuation of derivatives
instruments such as options, futures and swaps, the trading
of securities, risk management and regulation of financial
markets.