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 problems or 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 graduatelevel 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 FINANCIAL ENGINEERING
The

The

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

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.