FINANCIAL

ENGINEERING
FINAL PROJECT
ING. CIVIL
INDEX
1 .- What is financial engineering?
1.1. - Definition
1.2. - Characteristics
1.3. - Definition of what a financial engineer is
1.4. - Origin and evolution of financial engineering
2 .- Evolution of the financial system
2.1. - Evolution worldwide (1980 to present)
2.2. - Evolution at the level of Mexico
3 .- Evolution of financial intermediaries
3.1. - Private banking
3.2. - Brokerage houses
3.3. - Insurance
4 .- Financial engineering operations
4.1. - Business valuation
4.2. - Purchase of companies
4.3. - Sale of companies
4.4. - Risk capital
5 .- Area of financial engineering
5.1. - Business identification
5.2. - Financial restructuring and capitalization of liabilities
5.3. - Corporate divestment
5.4. - Institutional financing
5.5. - Corporate financing
5.6. - Financial evaluation
FINANCIAL ENGINEERING

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1.- What is financial engineering?
Financial Engineering has as its object of study the design, development and
implementation of innovative financial instruments and processes, supported by
mathematical, statistical, simulation and computing tools, for optimal risk
management and financial decision making.
1.1. -Characteristics
The basic characteristics of financial engineering are:

– The existence of an objective. - It is about developing an operation with a view to achieving

something, such as reducing risk or obtaining credit.

– The combination of instruments. - Financial engineering precisely arises when instruments

appear that can be combined with each other with effects even different from those for which they
were originally created.

– The conjunction of operations. - Which in isolation can be considered investment and financing,
generally with the intention that the positions are compensated.

– Always tailored operations and therefore in practically infinite number, since each operation can
be different depending on the conditions of the problem, the instruments used and the objective
to be achieved.

– Internationalized operations. - Most operations require the use of instruments specific to

international markets or that are only traded in such markets.

1.2. -Financial engineer

Currently there is no general concept that can define in a precise and definitive way
what constitutes financial engineering; However, we can enter its definition through
the meaning of each word:
ENGINEERING. - Science and art of applying the knowledge of pure science
to agricultural industrial technique in all its branches.
FINANCIAL. - Pertaining to matters relating to public finances, banking or
stock market issues or large commercial businesses.
In turn, the term Engineering is derived from the word human ingenuity, and the
same dictionary defines it like this:
INGENUITY. - Faculty of thinking or inventing quickly and easily.
1.3. - Origin and evolution
The term "Financial Engineering" first appeared in an advertisement by Chase
Manhattan Bank in 1986, which used it to describe the activities of the bank's risk
management team.

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In 1988, Financial Engineering was formally defined by Jon Sinergy in an article
titled "Financial Engineering in Corporate Finance" published in Financial
Management magazine . According to Finnerty, financial engineering involves the
design, development and implementation of innovative financial instruments and
processes and the formulation of creative solutions to problems in finance. The
author points out that in financial engineering there are 3 types of activities. The
first is innovation in securities that involves the development of financial instruments
such as types of bank accounts , new types of mutual funds, new types of life
insurance , mortgages. Also included are those instruments developed for
applications in corporate finance such as debt instruments, derivative products
such as options, futures and other risk management tools, and new types of
preferred shares and forms of convertible securities.
The second branch of financial engineering described by Finnerty involves the
development of innovative financial processes aimed at reducing the costs of
financial transactions.
The third branch includes creative problem solving in corporate finance. This
encompasses innovative cash flow strategies, debt management strategies and
corporate financing structures .
In 1990 and 1992 the first complete texts appeared focused exclusively on
Financial Engineering and the description of the profession in all its dimensions.
The first book published in the US that incorporated the term "financial engineering"
in its title was "The Hanbook of Financial Engineering", by CW Smith and C.W.
Smithson, which was published in 1990 and took the form of a collection.
Then came “Financial Engineering: A Complete Guide to Financial Innovation,” by
J.F. Marshall and Vipul K. Bansal, published in 1992 by the New York Institute of
Finance, and "Financial Engineering", by the same authors, published in Boston in
the same year. There are already hundreds of investigations of various kinds that
develop and apply financial engineering models in all types of economies
worldwide.
Since 1992, the International Association of Financial Engineers (IAFE) began to
operate, whose objectives are: to define the profession, to bring together
practitioners and academic communities responsible for the development of
Engineering.
Financial, generate education and research in that field, and study the aspects of
public policy that affect or are affected by it. This association currently brings
together thousands of finance professionals, and since 1993 it has chosen "The
Financial Engineer of the Year", to highlight the merits of experts, academics and
researchers who, through their contributions, have contributed to the enhancement
of the profession. Also well known is The Financial Engineering Associates (FEA),
founded in 1989 by Mark B. Garman, who became professor emeritus at the
University of California, Berkeley Business School . Likewise, multiple associations
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have been formed in specific fields of financial engineering, such as the
International Swaps and Derivatives Association (ISDA) and the Global Association
of Risk Professionals (GARP), among many others.
For the IAFE: "Financial Engineering is the creative development and application of
financial technology to solve financial problems and exploit financial opportunities.
"Financial Engineering is the act of innovating in finance."
For Jhon Finnerty: "Financial Engineering encompasses the design, development
and implementation of innovative financial instruments and processes, as well as
the formulation of creative solutions to financial problems"
According to Lawrence Galitz (2002), "The use of financial instruments to
restructure an existing financial profile and thus obtain another one with more
desirable properties."
Financial Engineering's object of study is the design, development and
implementation of innovative financial instruments and processes, for optimal risk
management and rational financial decision-making.
According to Franco (2010) Financial engineering is the act of innovating in finance.
A financial engineer must be versatile and a good communicator; have an excellent
understanding of the theory of finance, a broad background of mathematical,
statistical, and econometric models, and know the way in which these topics are
applicable to the structuring and optimization of financial portfolios, design and
valuation of basic financial instruments and derivatives, and analysis and
calculation of parameters and hedging strategies; must know the national and
international regulations inherent to financial markets and instruments and
understand the dynamics of the global economic environment; have expertise in
the generation and use of specialized financial software, databases and online
information, concerning the development and possibilities of new techniques in
finance; You must have a solid humanistic background, an inquiring and creative
mind and a great interest in solving riddles.
The ability to integrate the administrative, accounting and legal structure of
companies into turbulent and globalized economic environments represents an
exciting challenge for a financial engineer who must structure the best investment
and business financing alternatives. Global financial markets are increasingly
integrated and their structures and products more sophisticated. The financial
structure worldwide is very dynamic, financial markets have radically evolved in
their complexity, growth and interconnection, the multiple products in force and
their influence on the stability of the global economy, support the strong need for
fully prepared financial engineers, capable to act clearly in environments of high
uncertainty where only high technical preparation and solid ethical training can
increase the chances of success.

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2.- Evolution of the financial system
2.1. - Evolution worldwide (1980 – present)
Financial integration among industrialized nations grew substantially during the
1980s and 1990s, as did the liberalization of capital accounts. The integration
between French markets and banks produced benefits such as greater productivity
and broad risk sharing in the macroeconomy. The resulting interdependence also
came at a significant cost in terms of shared vulnerability and increased exposure
to systemic risks. Complementing financial integration in recent decades as a
succession of deregulation, in which countries abandoned regulations on the
behavior of financial intermediaries and simplified disclosure requirements to the
public and regulatory authorities. As economies became more open, nations
became more exposed to external shocks. Economists have argued that greater
global financial integration would have resulted in more volatile capital flows,
thereby increasing the potential for financial market turbulence. Given greater
integration among nations, a systemic crisis in one can easily infect the others. The
1980s and 1990s saw a wave of currency crises and sovereign defaults, including
Black Monday in 1987, the European Monetary System crisis in 1992, the Mexican
economic crisis of 1994, the Asian financial crisis in 1997, the Russian financial
crisis of 1998, and the Argentine economic crisis (1998-2002). These crises
differed in terms of their breadth, causes and aggravations, among which were the
capital struggles resulting from speculative attacks on fixed exchange rates which
were perceived to be mispriced given the nation's fiscal policy, satisfying the same
speculative attacks by investors hoping that other investors would follow suit given
existing doubts about the stability of the national currency, lack of access to
domestic capital markets in emerging market countries, and capital account
reversals

during conditions of limited capital mobility and dysfunctional banking systems.

Continuing to investigate the systemic crises that plagued developing countries

throughout the 1990s, economists have come to agree that the liberalization of
capital flows implies important prerequisites if these countries hope to realize the
benefits offered by globalization. financial. Such conditions include stable
macroeconomic policies, healthy fiscal policies, sound banking regulations, and
strong legal protection of property rights. Economists favor adherence to an
organized sequence of promoting foreign direct investment, liberalizing domestic
capital stock, and accepting capital outflows and short-term capital mobility once
the country has achieved domestic capital markets and has established a
successful regulatory framework. An emerging market economy must develop a
reliable currency in the eyes of both domestic and foreign investors to realize the
benefits of globalization, such as greater liquidity, greater savings at higher interest
rates, and accelerated economic growth. If a country adopts uncontrolled access to
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foreign capital markets without maintaining a reliable currency, then it becomes
vulnerable to speculative capital scrambles and shutdowns, which entails high
economic and social costs.

Countries sought to improve the sustainability and transparency of the global

financial system in response to crises in the 1980s and 1990s. The Basel
Committee was formed in 1974 by the central bank governors of G10 members to
facilitate cooperation in the supervision and regulation of banking practices. It is
headquartered at the Bank for International Settlements in Basel, Switzerland. The
committee has held a large number of rounds of deliberation commonly known as
the Basel Accords. The first of these agreements, known as Basel I, was motivated
by concerns about whether large multinational banks were appropriately regulated,
based on observations during the Latin American debt crisis of the 1980s. After
Basel I, the committee published recommendations for new capital requirements for
banks, which were implemented by the G10 nations four years later. In 1999 the
G10 established the Financial Stability Forum (reconstituted by the G20 in 2009 as
the Financial Stability Panel) to facilitate cooperation between regulatory agencies
and promote stability in the global financial system. The forum was credited with
developing and codifying twelve international standards and implementing them.
The Basel II agreement was established in 2004 and again emphasized capital
requirements as a safeguard against systemic risk, as well as the need for global
consistency in banking regulations so that there were no banks operating
internationally that were at a competitive disadvantage. It was motivated by what
were seen as deficiencies of the first agreement such as poor disclosure of the
banks' risk profile and supervision by regulatory bodies. Members implemented it
slowly, with major efforts by the European Union and the United States taking place
until 2007, and the Basel Committee revised capital requirements in a set of
improvements to Basel II known as Basel III, which focused on a requirement of a
leverage ratio prohibiting excessive leverage by banks. In addition to a
strengthening reason, Basel III modified the formulas used to measure risk and
calculate the capital limits necessary to mitigate banks' risk, concluding that the
capital limit should be established at 7% of the value of weighted assets. based on
the banks' risk.

Birth of the Economic and Monetary Union of the European Union 1992
Main article: Economic and Monetary Union of the European Union
In February 1992, the countries of the European Union signed the Maastricht
Treaty which outlined a three-stage plan to accelerate progress towards an
Economic and Monetary Union (EMU). The first stage was focused on liberalizing
capital mobility and aligning macroeconomic policies between countries. The
second stage established the European Monetary Institute which was finally
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dissolved along with the establishment in 1998 of the European Central Bank
(ECB) and the European System of Central Banks. A key factor for the Maastricht
Treaty was to highlight the convergence criterion that EU members would have to
satisfy before being allowed to proceed. The third and final stage introduced a
common currency for circulation known as the Euro, adopted by eleven of the then
fifteen members of the European Union in January 1999. By doing this, they
abandoned their sovereignty in terms of monetary policy. These countries
continued to circulate their legal tender currencies, exchangeable for euros at fixed
rates, until 2002 when the ECB began issuing official Euro coins and paper money.
Until 2011, the EMU comprised 17 nations that had issued the Euro and 11 non-
Euro states.

global financial crisis

Main articles: 2008 financial crisis and Great Recession.
After the market turbulence of the financial crises of the 1990s and the September
11 attacks in the United States in 2001, financial integration intensified between
developed nations and emerging markets, with substantial growth in financial flows.
capital between banks and in the trading of financial derivatives and structured
financial products. Global international capital flows grew from US$3 trillion to
US$11 trillion from 2002 to 2007, primarily in the form of short-term money market
instruments. The United States experienced growth in size and complexity of firms
engaged in a wide range of services across borders with the lifting of the Gram-
Leach-Bailey Act which repealed the Glas Segall Act of 1933, ending the limitations
of investment activities of commercial banks. Industrialized nations began to rely
more on financial capital to finance domestic investment opportunities, resulting in
unprecedented capital flows to advanced economies from developing countries, as
reflected in global imbalances which grew to 6% of gross world product. in 2007
3%.

The global financial crisis precipitated in 2007 and 2008 shared some of the key
features exhibited by the wave of financial crises of the 1990s, including
accelerated capital inflows, weak regulatory frameworks, loose monetary policies,
herd behavior during investment bubbles, collapse in asset prices and continued
leverage. The systemic problems originated in the United States and other
advanced nations. Similar to the 1997 Asian Crisis, the global crisis brought with it
vast borrowings by Banks undertaking unproductive real estate investments, as
well as weak corporate governance standards among financial intermediaries.
Particularly in the United States, the crisis was characterized by increasing
securitization of non-performing assets, large fiscal deficits, and excessive
financing in the housing sector. While the real estate bubble in the US triggered the
financial crisis, the bubble was financed by foreign capital from various countries.

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As its contagious effects began to infect other nations, the crisis became a
precursor to the global economic downturn now known as the Great Recession. At
the height of the crisis, the total volume of world trade in goods and services fell
10% from 2008 to 2009 and did not recover until 2011, with a growing
concentration in emerging market countries. The global financial crisis
demonstrated the negative effects of financial integration

global, emphasizing how and whether some countries should disengage

themselves from the system.

Euro Zone Crisis

Main article: Euro crisis
In 2009, Greece's newly elected government revealed falsification of its national
budget information, and that its fiscal deficit for the year was 12.7% of GDP
compared to the 3.7% set by the previous administration. This news alerted
markets to the fact that Greece's deficit would exceed the Euro Zone maximum of
3% set by the Economic and Monetary Union's Stability and Growth Pact. Investors
worried about a sovereign default quickly sold Greek bonds. Given Greece's
previous decision to adopt the euro as its currency, it no longer possessed
monetary policy autonomy and could not intervene to depreciate a national
currency to absorb the shock and boost efficiency, and was the traditional solution
to sudden capital flights. This crisis proved to be contagious when it spread to
Portugal, Italy and Spain (along with Greece they were collectively called PIGS).
Rating agencies downgraded the debt instruments of these countries in 2010 which
subsequently increased the affordability of refinancing or repaying their national
debts. The crisis continued to expand and soon grew into a European sovereign
debt that threatened economic recovery in the wake of the Great Recession.
Together with the IMF, European Union members compiled a €750 billion bailout
for Greece and other affected nations. Additionally, the ECB committed to
purchasing bonds from affected eurozone nations in an effort to mitigate the risk of
a panic in the banking system. The crisis is known by economists as a sign of deep
financial integration in Europe, contrasted with the lack of fiscal integration and
political unification necessary to prevent or respond effectively to crises. German
Federal Finance Minister Wolfgang Schäuble requested the expulsion of certain
countries from the eurozone. What is now known as the Euro Zone crisis has been
present since 2009 and has recently begun to include the Cyprus financial crisis.

2.2. - Level evolution of Mexico (1980 – present)

Since the middle of the 19th century the Financial System took its first steps. He
went through moments of tension, such as the Mexican Revolution.

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Even confusion during the emergence of financial groups, due to the lack of laws
that regulated them.
Thanks to this System, which the Mexican Stock Exchange defines as the organic
set of institutions that generate, capture, manage, guide and direct savings and
investment in the political-economic context that our country provides, today we
can make a transaction in online, buy products listed on the stock market or
withdraw money from a bank.
It is made up of normative and regulatory entities, such as the SHCP, Banxico or
Condusef; operational, among which are intermediaries and financial groups; and
support ones, such as the Mexican Academy of Stock Market Financial Law or the
Securities Rating Agencies.
But... how did it become what we know today? Here is a review of its history.

Timeline
1864: Banking in Mexico begins with the establishment in Mexico City of the branch
of the British bank The Bank of London, Mexico and South America.
1881: Foundation of the Mexican National Bank with capital from the Franco-
Egyptian Bank based in Paris.
1888: There were already banks in Yucatán, Chihuahua and Mexico City.
1894: The National Stock Exchange is born, with headquarters on Plateros Street
No.9, current Madero Street.
1895: The Mexican Stock Exchange is born. Runners led by Francisco A. Llerena
and Luis G. Necochea founded the company with that name. The Mexican Stock
Exchange is inaugurated.
1896: The exchange had three public and eight private stations.
1897: The Credit Institutions Law is promulgated with three banking models:
issuing banks with the power to issue banknotes, mortgage banks and replacement
banks. Until before the Revolution there were 24 issuing banks, two mortgage
banks and five repair banks.
1913-1915: Victoriano Huerta imposes loans on banks. In that period, the banks
granted loans to their government for almost 64 million pesos.
1917-1920: Venustiano Carranza orders the liquidation of the banks and begins to
seize their metal reserves. Before finishing the process he is murdered.

1917: Article 28 of the Constitution promulgates that in Mexico the power to issue
banknotes is exclusive to a single Issuing Bank, which would remain under the

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control of the Government. Foundations for the Bank of Mexico.
Before and after the Bank of Mexico
1925: The Bank of Mexico is founded.
1926-1932: A new banking law creates the figure of the national credit institution,
which would be development banking. Banobras and Nacional Financiera are some
of the national credit institutions.
1933: The statutes of the Mexican Stock Exchange SA are approved
1945: From 36 financial companies in 1941, it increased to 84 in 1945, due to the
ease of managing these institutions, raising funds and transferring them between
banks.
1950's: The Universal Banking model began, that is, financial grouping. That is, a
deposit bank could group as subsidiaries a financial company, a mortgage
company, a savings department and a trust department.
1970: The figure of financial groups is legally recognized in Mexico.
1974: The existence of 15 financial groups is recognized. The National Bank of
Mexico, Bank of London, Mexican Commercial Bank, Banco del País, Bank of
Industry and Commerce and International Bank.
The following year would mark a profound change in the Mexican Financial
System, which would put it to compete in international financial leagues.

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3.- Evolution of financial intermediaries
Development Banking is part of the Mexican Banking System, as established in
article 3 of the Credit Institutions Law. Within this framework, Development Banking
institutions are entities of the Federal Public Administration, with their own legal
personality and assets, constituted as national credit companies, whose
fundamental objective is to facilitate access to financing for natural persons and
morals; as well as provide them with technical assistance and training in the terms
of their respective organic laws.
In the performance of its functions, the Development Bank must preserve and
maintain its capital, guaranteeing the sustainability of its operation, through the
efficient, prudent and transparent channeling of resources.
Within the framework of the National Development Financing Program
(PRONAFIDE), Development Banking has been established as a fundamental
economic policy tool to promote development, solve problems of access to financial
services and improve their conditions for those sectors that stand out for their
contribution to economic growth and employment: micro, small and medium-sized
enterprises (MSMEs), public infrastructure, housing for low-income families, and
financing for low- and medium-income rural producers.
Consequently, the Development Banking policy has pursued the following
objectives:
Focus attention on the target population: SMEs, small and medium-sized rural
producers, housing for the low-income population, infrastructure projects and
municipalities.
Complement private financial intermediaries with funding and guarantees to
generate more and better credit channeling vehicles.
Promote greater coordination between development banks and other public
agencies whose programs support financing.
Promote long-term credit to support the competitiveness and capitalization of
productive units.
Evolution
Since its origins in the 1920s, Development Banking was created to provide
financial services in priority sectors for the country's economic development. It has
been a promoter of the financial system, savings and investment in industrial, rural
development, housing and infrastructure projects, which have generated a great
regional impact.
Over the last two decades, Development Banking has faced different processes to
once again position itself as the financial engine of the federal government:
Unsustainable growth (1991-1994): the growth in the Development Banking

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portfolio in said period was unsustainable. Poor credit granting and monitoring
processes led to an accumulation of overdue loans that required a subsequent
cleanup process and the need for the Federal Government to provide fiscal
resources to resolve the losses.
Financial consolidation (1995-2000): the financial consolidation process was
necessary after the financial crisis of 1994-95. Thus, the Development Bank had to
adopt measures to clean up its balance sheet, which resulted in a sharp drop in the
credit portfolio.
Stabilization and modernization (2000-2006): in this period, a modernization
process began to achieve financial sustainability and improve the operational
guidelines and corporate governance of the Development Bank. Among the
measures adopted, the regulation of Development Banking was standardized to
that of commercial banks and to the best international practices; Changes were
made to the legal framework to make the management of the institutions
transparent and independent directors were included in the governing bodies; New
institutions focused on their target population and with solid financial principles
were created (Sociedad Hipotecaria Federal and Bansefi) and those that were no
longer functional disappeared (Panal, Banrural and BNCI); Development Banking
began to use guarantees as a mechanism to encourage financial intermediaries to
finance priority sectors.
Controlled Expansion (Dec 2006 to date): this administration found a Development
Bank with a solid financial base. From its inception, Development Banking was
recognized as an economic policy instrument to promote the country's growth and
contribute to the deepening of the financial system.

3.2.- Bag houses

Investors seeking to participate in the financial market (in our country it will be the
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Mexican Stock Exchange) will have to do so through a financial intermediary;
These being: stock exchange houses, stock market specialists, all those financial
entities authorized by law to operate with securities in their market.
Brokerage houses and stock market specialists must be authorized, which must be
organized as established by the General Law of Commercial Companies.
Among the functions that brokerage firms may perform, in accordance with the
Securities Market Law, are: Acting as intermediaries in the securities market;
receive funds for operations with securities entrusted to them; provide advice on
securities matters directly or through subsidiary companies; They may receive
loans or credits from credit institutions or securities market support organizations;
grant credits for the acquisition of securities with their guarantee; enter into reports
and loans with securities; act as fiduciaries in businesses directly linked to their
own activities.
Likewise, in accordance with the provisions issued by the National Banking and
Securities Commission, they may carry out operations on their own account that
facilitate the placement of securities or that help to give greater stability to their
prices, and to reduce the margins between purchase quotes and sale of the titles
themselves; They can provide the service of custody and administration of
securities, depositing the securities in the brokerage house itself, in an institution
for the deposit of securities or, where appropriate, where the National Banking and
Securities Commission determines; They can make investments from their global
capital; They can carry out operations through offices and branches, agencies of
credit institutions; invest in shares of other companies that provide services to
them; act as stock market specialists; enter into financial operations known as
derivatives, as long as they comply with the risk management requirements
established for this purpose.
Consequently, a saver who wants to become an investor who seeks to obtain
better results in terms of returns, may be advised by officials of a brokerage house,
who, in accordance with the laws of the Stock Market, will have the obligation to
serve him in the best possible way. possible way in order to make them aware of
the various investment funds that exist in the financial market, and it is the saver
themselves who, in a responsible manner and having assessed the advantages
and disadvantages that they may have when choosing one of the investment funds
that are have been presented to you, decide which one to take and be able to
allocate your savings so that they give you the results you expect.
The investor should not forget when making the decision to place his savings in a
certain fund: what his objective will be when investing, what term he wants to place
said investment and how much risk he wants to take (since this is very important
when deciding, considering that high profits are greater risks), therefore, the
investor must take into account what his stock market advisor has explained to him,
what his bank manager has told him regarding the risks that one has when deciding

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to participate in a financial market. , open to the public and have you ever heard
that you have big profits, but you can also have big losses.
It will always be interesting for any person (saver and with the desire to earn more)
to take into account that only they will be responsible for their decision, but it will
also be interesting for them to consider that the stock market advisor will not stop
being a seller of funds for the company where he works, so it will require thinking
carefully about any decision he is going to make.
It is also important to seek advice from a legal specialist, since the brokerage firm
and the investor will sign a contract for the provision of stock market services, and it
is advisable not to overlook everything that will be established in the same contract,
so that tomorrow, Do not be surprised and leave all the freedom to invest to your
advisor, but the saver should always be consulted for any changes or modifications
that must be made in terms of reinvestment of profits, in exchange for the term of
their investment, or otherwise. type of fund, and be monitoring the ups and downs
and results of the financial market.
Dear saver, if you are looking for better results and above all you want what it has
cost you so much work to achieve or gather, go to a serious brokerage house
(there are many currently), ask, get informed, talk to people you trust, with
professionals who know about financial matters and do not let themselves be
carried away by feelings, or by simple hunches, since in the end what you want is
to increase your savings, improve your assets and this is a matter that must be
taken very seriously.
3.3.- insurance
Insurance is a contract, called an insurance policy, by which an Insurance
Company (the insurer) undertakes, by charging a premium and in the event that the
event occurs whose risk is the subject of coverage to indemnify, within the agreed
limits, the damage caused to the insured; either through capital, income, or through
the provision of a service. This contract involves: The insurer, which must always
be an insurance company, which is the entity responsible for coverage in the event
of an accident, The policyholder, who is the owner of the insurance policy and
responsible for paying the premium corresponding, the insured who is the person
who is insured (either him or her property or interests, and the beneficiary who is
the person who will collect the corresponding compensation in the event of an
accident. These three figures do not always have to be the same person and they
can all be different. As an example: A company (policyholder) that pays life
insurance for its employee (insured) so that their children (beneficiaries) can collect
in the event of their death.
There may also be another figure, the mediator, who is the person who mediates
between the Policyholder and the insurance company before the purchase of the
insurance policy, at the time of formalization (purchase) and after the purchase
(modifications). that are necessary, claims processing, etc.).
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The amount of money charged for insurance is called the premium. The premium
guarantees that the insurer is obliged to fulfill the benefits it has promised to the
Policyholder.
Risk management, which is the practice of risk assessment and control, has
developed as a discrete field of study and practice.
The transaction involves the insured incurring a relatively small and known loss in
the form of payment of a premium to the insurer in exchange for the insurance
company's guarantee to compensate (indemnify) the insured in the event of a
financial or business loss. .
The insured receives a contract, called the insurance policy, that details the
conditions and circumstances under which the insured will be compensated.
From a mathematical point of view, insurance transforms the risks to which people
are subjected into bearable probabilities through an organization. Insurance is
configured as a basic piece of the current social structure.[1] The insurance
institution has two major manifestations in society:
Social security, which is a mandatory coverage system, administered by the State,
aimed at providing protection and well-being to citizens, which usually guarantees
an economic benefit in the event of retirement, incapacity for work, death,
unemployment, etc.
Private insurance, which covers and protects the people or entities it contracts, and
may be mandatory or voluntary subscription. Examples of private insurance are
property theft or fire insurance or automobile or personal accident insurance.
Insurance sector
Insurance companies are financial intermediaries from an economic and financial
point of view. This sector differs from other economic sectors in that, to start its
activity, it needs a relatively small fixed capital, since it does not need to make large
investments in assets to carry out its activity and its circulating capital is advanced
by its own clients on account of the product. that has to start manufacturing at that
moment (security). Therefore, theoretically, its technical financing needs are very
small. On the other hand, the product they sell, security, is guaranteed to all
customers, although delivery is only made to a part of the clientele. Time also
works in favor of the insurer, since the corresponding cost (the accident rate) is
distributed by postponing it and giving rise, meanwhile, to an accumulation of
savings that form the so-called technical provisions; Therefore, from a financial
point of view, the policyholder of an insurance policy is a lender who provides credit
to the insurer to manufacture the product (security), thus turning the insurer into a
mere investor of the funds not consumed.
Insurance activity, by its very nature, converts into long-term investment what, in
general, the insurance policyholder did not even consider savings. However, it is a

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savings that from a financial point of view is very stable and long-term.
In the European Union, as well as in most countries in the world, private insurers
are subject to control and supervision by administrative authorities, and in order to
operate they need to obtain special authorization, since insurance is a contract. in
which the insured pays the premium in advance, while the insurer will compensate
him or her a posteriori when the accident occurs and therefore it is in the public
interest that the insurer has the financial capacity to do so by then. All this is done
under provisions of Administrative Law dictated by the authorities. In Spain, this
control of private insurers is carried out by the Ministry of Finance and
Competitiveness through the General Directorate of Insurance and Pension Funds
(DGSFP),[8] while in the European Union supervision is carried out by the
European Insurance Authority. Insurance and Retirement Pensions.
4 .- The four operations of financial engineering
4.1. -Company valuation
It is a process frequently used by investors to determine the financial merits of a
given asset, it helps to know if the shares of a particular company are undervalued
or overvalued. It is the process of estimating the value of an asset or liability.
A financial asset (bond, stock), or a real asset (building, machinery), is based on
the present value of the cash flows that that asset is expected to produce in the
future.
Advantages of financial valuation in a company:
• Search for investors, strategic partners and buyers
• Identify sources of value and leverage in the business
• Evaluate the profitability obtained based on the value of the company
Financial valuation methods:
The valuation of financial assets is done using one or more of these methods or
models.
Absolute valuation model:
They determine value by estimating the asset's expected future cash flows
discounted to its current value known as the Discounted Cash Flow Method.
Relative valuation models:
They determine value based on market prices of similar assets.
Options valuation models:
Used for certain types of derivative financial assets (e.g. warrants, stock options,
options on other asset classes, futures, etc.) they are complex models of current
value.
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Effective valuation
Effective valuation depends largely on the reliability of the company's financial
information.
The Financial Statements must be subject to the Financial Reporting Standards
(NIF'S), and must present:
• Consistency in the application of Financial Reporting Standards
• Consistency in the presentation of financial statements
• That the latter can be ruled (preferably), since for the analyst it will show
security in the figures
The effective valuation must recognize the existence of the market and current and
future competitors.
Obtaining economic-administrative data:
Constitution of the company extract the main data from the articles of incorporation
and minutes of the assembly.
Study the current direction of the company, as well as its future plans.
Contracts and agreements that the company has with credit institutions, suppliers,
commission agents, treasury, etc.
4.2. - Purchase of companies
Buying and selling companies or trading companies in English is the process
through which a seller sells a company to a third party (buyer) who acquires it
under certain conditions. These conditions in the sale of businesses vary
depending on the negotiation carried out between buyer and seller.
It is one of the most important legal transactions for any businessman along with
the sale and purchase of real estate for the amounts we are talking about.
Companies have a value in the market, this being an important asset in the assets
of any businessman.
These conditions can be of all kinds since the sale is not always carried out with the
delivery of money.
Within what is the sale and purchase of companies, different modalities can occur
not only in the means of payment but also in the percentages acquired.
4.3. - sale of companies
Selling is one of the most sought-after activities by companies, organizations or
people who offer something (products, services or others) to their target market,
because its success depends directly on the number of times they carry out this
activity, how well that they do it and how profitable it is for them to do so.

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Therefore, it is essential that all people who are involved in marketing activities, and
especially sales, know the answer to a basic but fundamental question:
Definition of Sale, According to Various Authors:
The American Marketing Association defines selling as "the personal or impersonal
process by which the seller ascertains, activates, and satisfies the needs of the
buyer for the mutual and continuing benefit of both (the seller and the buyer)."
The Cultural SA Marketing Dictionary defines a sale as "a contract in which the
seller undertakes to transmit a thing or a right to the buyer, in exchange for a
certain amount of money." It also includes in its definition that "selling can be
considered as a personal or impersonal process through which the seller seeks to
influence the buyer."
Allan L. Reid, author of the book "Modern Sales Techniques and Their
Applications," states that selling promotes an exchange of products and services.
Ricardo Romero, author of the book "Marketing", defines sale as "the transfer of
merchandise for an agreed price. The sale can be: 1) in cash, when the
merchandise is paid at the time of taking it, 2) on credit, when the price is paid after
the acquisition and 3) in installments, when the payment is divided into several
deliveries. successive".
Laura Fischer and Jorge Espejo, authors of the book "Marketing", consider that
selling is a function that is part of the systematic marketing process and define it as
"any activity that generates in customers the ultimate impulse towards exchange."
Both authors also point out that it is "at this point (the sale), where the effort of the
previous activities (market research, product decisions and price decisions)
becomes effective."
The Dictionary of the Royal Spanish Academy defines sale as "the action and effect
of selling. Amount of things sold. "Contract by virtue of which one's property is
transferred to another's domain for the agreed price."
4.4. - Risk capital
Venture capital (known in Latin America as entrepreneurial capital and in English
as: Venture capital (VC)) consists of financing Stuart-ups in the growth phase with
high potential and risk.
Venture capital funds benefit from this type of operations by becoming owners of
the assets of the companies in which they invest, these are normally companies
that have a new technology or a new business model within a technological sector,
such as biotechnology, ICT, software, etc.
Venture capital entities may take stakes in the capital of companies listed on stock
exchanges as long as such companies are delisted within twelve months following

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taking the stake. An example of this type of investment has been in the company
Twitter, by venture capital entities.
The objective is that, with the help of venture capital, the company increases its
value and once the investment matures, the capitalist withdraws making a profit.
The venture investor seeks to take a stake in companies that belong to dynamic
sectors of the economy, which are expected to have above-average growth. Once
the value of the company has increased sufficiently, the venture funds withdraw
from the business, consolidating its profitability. The main exit strategies proposed
for an investment of this type are:
Sale to a strategic investor.
IPO (initial public offering) of the company's shares.
Repurchase of shares by the company.
the sale to another venture capital entity.
Venture capital operates by evaluating the business plan of the projects presented
to them by entrepreneurs through Investment Committees, which analyze the
convenience of becoming a shareholder in these companies. For each business
sector there are specialized funds that can help and financially boost a business
idea. Always from a business point of view, taking the best financing option when
applying for capital funds.
5 .- Scope of financial engineering
5.1. - Business identification
Business opportunity refers to the occasion or opportunity to start a business idea,
enter a new job sector or launch a new product on the market. A good example of a
business opportunity is when a need is identified in an unsatisfied market, also
having the financial and technological capacity.
The concept of business opportunity is always present in the business market. It is
about taking advantage of a consumer need, satisfying a demand or presenting a
new service or item on the market that stands out for its innovative potential.
Finding a business opportunity requires patience, paying attention above all to new
developments that arise in the market. Just as caution is required while waiting for
that moment, you also have to act quickly once that idea arises to get ahead of
your competitors. Taking advantage of the right moment will above all prevent us
from ending up in business bankruptcy.
The definition of a business opportunity is becoming increasingly better known
thanks to entrepreneurs who decide to implement their business ideas or
proposals.

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Ways to detect a business opportunity
Finding business opportunities is not an easy task, but it is necessary. There are
different ways to identify business opportunities that allow us to move forward with
our new company or new products that are developed.
Recognize needs: there will always be essential needs such as health or food, but
new ones will also emerge that will not be as important, but that will contribute to
satisfying the user's demands.
Identify complications: business opportunities will also appear with the detection of
needs resulting from problems in people's daily lives.
Adapt to changes: the market changes from one day to the next, changing the
desires, needs, habits, customs and fashions of consumers. This will require being
attentive to changes.
Clues about business opportunities: in our environment there are businessmen,
entrepreneurs, suppliers and clients who can turn on the light bulb when it comes to
business opportunities. Since they are in many cases experts in a certain sector,
they can reveal which products are in short supply, the means to obtain the best
prices, etc.
5.2. - Financial restructuring and capitalization of liabilities
Debt Reunification, Loan Reunification, Credit Reunification, etc. For more than five
years now, and especially since the beginning of the economic crisis,
advertisements have been common in the media such as the Press, Radio,
Television, Internet&hellip. However, this terminology is generalized to identify the
Financial Restructuring processes.
It is necessary to differentiate more than the terms, the processes that encompass
each of the different terms used. There are many companies dedicated to the
Reunification of Debts, Loans, Credits, etc., but they are unilateral processes and
independent of a global business rescue process. Financial Restructuring is the
complement to a comprehensive Business Restructuring process. As mentioned in
previous articles, this process should in most cases be one more phase within the
business rescue process.
When is a Financial Restructuring needed?
The Financial Restructuring process is difficult to place in a framework or typical
situation, due to the uniqueness that exists in the problems of each type of
company. But in view of unifying a similar criterion independent of the typology,
sector and characteristics of the company, we use the context of article, 2 Law
22/2003, July 9, Bankruptcy, to define the Financial Insolvency of a company as:
Financial Restructuring “Generalized non-compliance with obligations such as:
enforceable tax obligations, social security contributions, other concepts of joint

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collection, payment of salaries and compensation and other remuneration derived
from employment relationships, obligations with commercial suppliers and bank
creditors ”.
Based on this, it is necessary for the company to carry out a Financial
Restructuring process before the situation presented arises and avoid incurring a
situation of Financial Insolvency.
How to act if we find ourselves facing the Financial Insolvency of the company?
Firstly, reiterate that Financial Restructuring must be linked to Operational
Restructuring to establish long-term competitive advantages, and not only short-
term solutions.
The Company must carry out an economic-financial and strategic analysis to
determine the causes of the regular non-compliance with its most enforceable
obligations. Based on the conclusions obtained, it is necessary to coordinate the
objectives established in the Operational Restructuring with the actions to be
carried out in the Financial Restructuring process, determining action plans in the
short, medium and long term.
For this, it is necessary to prepare a Financial Viability Plan that incorporates a
treasury forecast (Cash Flow) in each of the scenarios, current scenario, and
scenario after the Financial Restructuring process. By applying the established
short, medium and long-term plans, we must obtain a Cash Flow for the Company
that allows its survival and long-term competitive improvement.
What are the Tools used in the Financial Restructuring processes with Financial
Entities (Banks, Savings Banks, etc.)?

The tools generally used in Financial Restructuring processes are usually the
following:
1) Lack of capital payment on the Company's loans and credits
2) Extension of the term of the Company's loans and credits
3) Deferral of interest payment and subsequent capitalization
4) Capital removals from the Company's loans and credits
Capital Reductions are a tool commonly used in Debt Restructuring processes with
Commercial Creditors. In the case of Financial Entities, this tool is not used except
in the Agreements Phase of the Bankruptcy Process.
5) Payment operations
Payment dación operations consist of the cancellation of the debtor's debt, in this
case of the company, nos, with the financial institution through the delivery by the
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debtor, generally of a real estate or personal asset belonging to it.
And what are the most used Tools currently in Financial Restructuring processes
with Financial Entities? And because?
Currently, the commonly used tools are: Lack of payment of Capital and Extension
of the Term. Financial Entities (Banks, Savings Banks...) are doing away with the
use of the other three tools (Deferral of interest payment and subsequent
capitalization, capital removals and payment dation operations) because it forces
them to use economic resources .
But why do we say that these tools force Financial Entities to use economic
resources?
In the case of using the tool (Deferral of Interest payment and subsequent
capitalization), the Credit Financial Entity would have to increase its risk position on
debt (Liabilities) already granted to the company due to the increase in the nominal
capital amount of the loan or credit.
And in the case of using the tool (Dación de Pago), the Financial Entity should
carry out the acquisition of the company's assets, with the consequent contribution
of new resources and subsequently cancel the existing indebtedness of the
company with the Financial Entity.
There is another type of tools but they are not related to SME Restructuring
processes but rather to Companies with a high volume of Financial Liabilities called
“Large Company”, which can be listed or unlisted. One of the best known is Debt
Capitalization, that is, under an agreement between the debtor and the Financial
Entity, the latter is temporarily included in the company's share capital. Through this
formula, the debt ratio is drastically reduced, that is, the financial leverage of the
company, allowing it to achieve new financing for society. As we have commented,
this type of tool cannot have a place in SME Restructuring processes due to the
complexity of this process.
And the tools with Commercial Creditors and Non-Commercial Creditors?
The tools exposed and applicable to Debt with Banking Entities are also applicable
to the rest of the Company's Creditors, both Commercial and Non-Commercial
Creditors (Tax Obligations, for example). In both cases, the Payment Deferral tool
is generally applied.
In the case of Commercial Creditors, the tool of payment deferral is exercised,
seeking two objectives:
1) - Increase the PMP (Average Payment Period), trying to make the PMP greater
than the PMC (Average Collection Period). With this we achieved commercial
financing, which allows us to improve the Company's Operating Cash Flow.
2) - In the event of overdue debts with said Commercial Creditors, a payment

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vehicle (Payment Plan) associated with the commercial activity that links them is
established, seeking to maintain the relationship with the Strategic Creditor in the
long term, avoiding, the loss of supply by it.
In the case of Non-Commercial Creditors, which generally involve indebtedness
with Fiscal and Tax Organizations, it is possible to seek the deferral of the payment
of taxes and social security contributions, establishing a payment system by
providing additional guarantees, being valid in the most cases real estate
guarantees.
In short, Financial Restructuring is and should be the complement to a
comprehensive business rescue process. Its application individually can correct
and resolve short-term deviations from the company and structural problems of
society. At the same time, this process requires the application of the various tools
mentioned to achieve this objective, being necessary an in-depth study of the best
combination of both in order to significantly alleviate and improve the Cash Flow of
the Company, avoiding its Financial Insolvency.
5.3. - Corporate restructuring
A corporate divestiture occurs when an incorporated company sells significant
assets. In general, the asset being transferred is a product line or subsidiary. A
divestiture occurs for one of two reasons. Either because a court orders the
company to sell part of its assets or because the entity chooses to sell the assets
for corporate reasons. Understanding corporate divestitures is important for small
businesses because the process could either provide them with the necessary
capital if the business is being unwound, or because the business could seek new
business opportunities through the purchase of the assets being divested.
disinvestment.
Antitrust
Antitrust actions are legal proceedings initiated by the government against
companies that are created so that they can have such a concentration of wealth
and resources that their continued existence in their composition could negatively
affect the market. Based on the Sherman Antitrust Act, if a business is found to
have a monopoly, a court can order the company to "break up." The hoarding
business would be forced to divest assets until the company no longer has an
unfair advantage. An example of a court-ordered divestiture is the case of AT&T,
where the company was divided into 164 smaller parts. Although it is very unlikely
that a small business will be considered a monopoly, judicially forced divestitures
could provide an opportunity for small businesses to acquire assets at a cheaper
price than they could otherwise obtain.
Business considerations
There are a variety of reasons why a company may choose to divest, beyond the
reasons of exiting a product line that is inherently unproductive. The company's
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management may decide if it is simply not equipped to handle a certain subsidiary's
business effectively. Sometimes a company may decide to simply sell a set of
assets since it is no longer interested in that particular product or service line. In
other situations, companies that were expected to support each other do not do so,
and one of them has to be sold. Furthermore, one product line may be profitable,
but there is another opportunity that has greater possibilities for the company and
therefore the existing asset needs to be sold to obtain the necessary capital. In
these situations, the forced sale of these assets of a company could represent a
solid investment opportunity for a small business to acquire existing business
infrastructure more cheaply and make it more profitable than the original
corporation.
Tax considerations and declarations
When a company has to sell its assets, it has to report the event on its tax return.
Corporations are taxable entities that must file each year. The amount of the gain
or loss will depend on a variety of factors, such as the depreciation applied to the
assets, the original purchase price of the assets, and what the company's
ownership received for its sold assets. When completing its tax return, the
corporation must have it completed and reviewed by a certified public accountant to
ensure compliance with all tax laws. Every effort has been made to ensure the
accuracy of this article, but it is not intended to provide legal advice.
5.4. - Institutional financing
In Mexico there are various sources of long-term financing in national currency for
infrastructure projects. The public investment made by the Federal Government
through the Federal Expenditure Budget (PEF) stands out, as well as the National
Infrastructure Fund (FONADIN), development banking, commercial banking and
the diversity of financial vehicles available in the market. stock market Likewise, in
recent years various Multilateral Development Organizations such as the Inter-
American Development Bank (IDB), the International Finance Corporation (IFC),
the Multilateral Investment Fund (MIF), among others, have supported the
development of infrastructure in Mexico. focused on sustainable, integrative
projects that benefit society in general.
EXPENDITURE BUDGET OF THE FEDERATION (PEF)
The Federation Expenditure Budget is one of the most important public finance
documents of our country, prepared by the SHCP. It describes the amount, form of
distribution and destination of public resources of the three powers (Executive,
Legislative and Judicial), of autonomous organizations, such as the National
Electoral Institute and the National Human Rights Commission, as well as such as
transfers to state and municipal governments.

The approval of the Budget is a joint effort between the Federal Executive through
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the SHCP and the legislative branch through the Chamber of Deputies, through the
Budget and Public Accounts Commission. The Commission reviews the PEF
Project (PPEF) sent by the SHCP, makes a corresponding opinion to proceed to
the vote of the plenary session of the Chamber of Deputies. If approved, it is sent to
the Federal Executive for publication in the Official Gazette of the Federation. If it is
not approved, the PPEF is sent back to the commission for a new analysis and
discussion. It is worth mentioning that within this process there are times that must
be met by law.

Federation Expenditure Budget Approval Process

5.5. - corporate financing

We have the necessary experience to design innovative solutions, which is why we
can offer you share placement services, as well as financing instruments with
variable terms based on the requirements of your company.
Corporate Financing services in the primary market are:
Debt Placement
Intermediation and advice on short and long-term corporate debt placements
Short-Term Stock Certificates
Stock certificates

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Subordinated Obligations
Capital placements
Intermediation and advice on capital market placements
Acquisition, Merger or Sales of a company or asset portfolio
Process the meeting passes requested by clients, both for holders' and
shareholders' meetings.
Characteristics
Advice from experts in the field
Carry out the procedures before the corresponding institutions
Ensures timely availability of financial resources
Monitors the financial development of emissions.
5.6. - Financial evaluation
The objective of the financial evaluation is to determine the profitability levels of a
project, for which the income generated by the project is compared with the costs
that the project incurs, taking into account the opportunity cost of funds.
On the other hand, the structure and condition of financing must also be
determined, and in turn the impact of the project on the finances of the entity, since
this will determine if it is subject to credit in the event of a possible need for
financing.
In general, it can be said that financial evaluation is the study made of the
information provided by accounting and all other information available to try to
determine the financial situation or specific sector thereof.
Internal rate of return:
The internal rate of return (IRR) aims to focus on the rate of return of a project.
When both aspects conflict, the company must maximize its value, not its rate of
return.
The Internal Rate of Return of an investment project is the discount rate (r), which
makes the present value of the (positive) benefit flows equal to the present value of
the negative investment flows.
The IRR has advantages and disadvantages which are:
Advantages:
Takes into account all flows and their distribution over time.
It does intrinsically weigh the importance of the initial investment.
If the IRR is greater than K (Calculation of the cost of capital), it is guaranteed to
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cover the investment, the financial cost and generate an excellent return that
increases the wealth of the company.
Disadvantages:
It does not maximize profit, which is the company's objective.
It does not lead to optimal decisions when faced with projects with economically
unequal lives, so it is not recommended to use it.
It is possible for multiple IRRs to be submitted on a single project.
Present value
Present value is also known as Net present value (NPV), this is one of the financial
methods that aims to take into account cash flows as a function of time.
It consists of finding the difference between the present value of profit flows and the
present value of investments and other cash expenditures. The rate that it uses to
discount the flows is the minimum acceptable return of the company (K), below
which investment projects should not be executed.

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