Meaning and Scope of Financial Engineering

&

Financial Engineering Vs Financial Analysis

Vikas Sahota MBA General Section B University Business School

DEFINITION OF FINANCIAL ENGINEERING

Generalized DefinitionsFinancial Engineering refers to

bundling and unbundling of securitiesDone in order to maximize profit by

using different combinations of equity,futures,fixed income assets etc

It applies theoretical finance and computer modeling skills to make pricing, hedging, trading and portfolio management decisions.

Specializing Definition

Financial Engineering is “RISK MANAGEMENT” via

Creative structural tools

FINANCIAL ENGINEERING BY JOHN FINNERTY

“ Financial Engineering involves the design , the

development and the implementation of innovative financial instruments and processes and formulation of creative solutions in finance.”

Creativity an issue of contention

Whether introduction of a revolutionary

new product

Whether a novel twist on an old idea

QAn example for difficulty in distinguishing the nature of

creativity ??

ATrading in which managers try to

exploit price discrepancies between the cash market for

equities and stock index futures, in fact it has been practiced in

grain trade since past one century

FINANCIAL ENGINEERING IN MODERN TIMES

Finance

EngineeringI.T

A SUMMED UP DEFINITION . . . .

EXPANSE AND LINKAGES OF FINANCIAL ENGINEERING

PLEASE TAKE A NOTE . . . .

Financial Engineering is not just limited to corporate and institutional applications recent financial innovations indicate its span percolating to retail also called consumer level

Eg Rate adjustable mortgages NOW Accounts IRAs and Keoghs Various new forms of life insurances

TRIO ROLE OF FINANCIAL ENGINEERS

Deal Makers(marketers)

Idea Generators(innovators)

Loophole

exploiters

(outlaws)

INVOLVEMENT OF FINANCIAL ENGINEERS

OTHER IMPORTANT FIELDS FOR FINANCIAL ENGINEERS

Corporate financing – financial engineering in merger & acquisitions eg introduction of junk bonds and bridge financing.

Arbitrage strategies involving opportunities across space, time, instruments, risk, legal jurisdictions and tax rates.

Financial engineers have played rampant role in investment and money management by developing new investment vehicles like mutual funds, money market funds etc

Conversion of high risk instruments into low risk instruments by repackaging and overcollateralization

FINANCIAL ENGINEERING VS FINANCIAL ANALYSIS

Thank You for your patient listening. .