FINANCIAL ENGINEERING

• Submitted To:-Janki mistry

• Submitted By:-
• Binita Shah
• Krutika Sheth
• Unnati Patel
• Chandraprabha Rana
 What is Financial Engineering?

• Financial Engineering involves the design,

development and the implementation of
innovative financial instruments and
processes and the formulation of creative
solutions to problems in finance.
 Scope of Financial Engineering
• To use the existing products to reduce firm’s
financial risk.
• To reduce the cost of firm’s financing
• To gain some accounting tax benefit
• To exploit a market inefficiency
• To invest and manage money in a customized
manner.
 Tools of Financial Engineering

Like any other engineer the successful

financial engineer needs a toolkit. We find it
convenient to divide the tools of financial
engineer into two broad categories:-
•Conceptual
•Physical
• The conceptual tools involve the ideas and
concepts which underlie finance as a formal
dicipline.
• Example:-valuation theory, Portfolio theory,
hedging theory, accounting relationships,and
tax treatment under different forms of
business organisation.
• The physical tools of financial engineer include
the instruments and process which can be
pieced together to accomplish some specific
purpose.
• The processes include such things as
electronic securities trading, public offering
and private placement of securities, shell
registration and electronic fund transfer.
 Financial engineering V/S Financial
Analyst
• A FINANCIAL ANALYST is a person engaged in
the practice of studying the nature of
something in order to determine its essential
features and their relationships.
• A FINANCIAL ENGINEERING is the process of
formulating and implementing a new
instrument,a new process or a creative
solution to a problem.
Financial Engineers are prepared for
careers in:
What is a security?
A security is a fungible, negotiable
instrument representing financial value.

Securities are broadly categorized into

debt and equity securities
such as bonds and
common stocks,
respectively.
 Equity
An equity security is a share in the capital stock of a
company (typically common stock, although preferred equity
is also a form of capital stock).

The holder of an equity is a shareholder, owning a share, or

fractional part of the issuer. Unlike debt securities, which
typically require regular payments (interest) to the holder,
equity securities are not entitled to any payment.

Equity also enjoys the right to profits and capital gain.

 Debt
Debt securities may be called debentures, bonds, notes or
commercial paper depending on their maturity and certain
other characteristics.

The holder of a debt security is typically entitled to the

payment of principal and interest, together with other
contractual rights under the terms of the issue, such as the
right to receive certain information.

Debt securities are generally issued for a fixed term and

redeemable by the issuer at the end of that term.
 Factors Contributing to the Growth of
Financial Engineering
1.Environmental factors:
• Price Volatility
• Globalisation of the Market
• Tax Asymmetries
• Technological Advances
• Advances in Financial Theory
• Regulatory Change and Increased
Competition
2.Intrafirm Factors:
• Liquidity needs
• Risk Aversion
• Agency Costs