Saturday, January 18, 2020
Financial Engineering Introduction Many innovations are taking place in the place of arena of finance. Such innovations are collectively called financial innovation. Financial innovation is a process to adapt existing financial instruments and processes and to develop new one so as to enable financial market participants to cope more effectively with the changing world. In recent years fast developments are taking place in corporate and banking sectors. This has given birth to a new discipline which has come to called financial engineering.The term financial engineering was introduced by London banks. Financial engineering is the life blood of financial innovation. Financial Engineering Financial engineeringÃ is a multidisciplinary field involving financial theory, the methods of engineering, the tools of mathematics and the practice of programming. Ã It has also been defined as the application of technical methods, especially fromÃ mathematical financeÃ andÃ computation al finance, in the practice ofÃ finance. In the United States, financial engineering programs are accredited by theÃ International Association of Financial Engineers.Financial engineering draws on tools fromÃ applied mathematics,Ã computer science,Ã statisticsÃ andÃ economic theory. In broadest definition, anyone who uses technical tools in finance could be called a financial engineer, for example anyÃ computer programmerÃ in aÃ bankÃ or anyÃ statisticianÃ in a government economic bureau. However, most practitioners restrict the term to someone educated in the full range of tools of modern finance and whose work is informed by financial theory. It is sometimes restricted even further, to cover only those originating new financial products and strategies.Financial Engineering refers to the bundling and unbundling of securities. This is done in order to maximize profits using different combinations of equity, futures, options, fixed income, and swaps. They ap ply theoretical finance and computer modeling skills to make pricing, hedging, trading and portfolio management decisions. Financial Engineers are prepared for careers in: * Investment Banking * Corporate Strategic Planning * Risk Management * Primary and Derivatives Securities Valuation * Financial Information Systems Management Portfolio Management * Security Trading Tools of financial engineering * Conceptual Tools It includes ideas and concepts on which finance as a subject is based. These includes valuation theory, portfolio theory, hedging theory, tax treatment etc. * Physical tools It includes the instruments and processes which can be combined together to accomplish some specific purposes. Factors contributing to the growth of Financial Engineering * Environmental Factors (External Factors) A) Change in price level B) Globalization of marketsC) Technological advancement D) Differential tax rates * Internal Factors A) Liquidity needs B) Risk aversion C) Agency Costs D) Accoun ting benefits Financial Reengineering Financial reengineering is the concept of 21st century. Really speaking, it is an evolving concept. It is an extension of financial engineering. Newer and newer developments are taking place now in finance and related fields. Hence the existing instruments and processes must reengineer to suit the changing environment. This gives birth to financial reengineering.