The current financial system can be re-changed or redesigned in order to meet one’s needs and demands with the help of Financial Engineering.So, Financial Engineering is a discipline based on knowledge of the physical and Economic science,and mathematics.With the support of information technology and finance,it is aimed at the designing, development and implementation of models, tools and processes that give an optimal solution to different economic and financial problems in a country marked by uncertainty and risk environment.
It focuses on the fight against the risk profiles of institutions offering a double choice:
- Replace all risk of certainty
- Replace the harmful risk leaving only the beneficial risk.
It can also be defined as the application of the invention and the use of financial instruments for investment in a company to be profitable without risk.
APPLICATIONS OF FINANCIAL ENGINEERING
The applications of financial engineering are summarized in four basic areas:
The Coverage: It occurs when an entity that is already subject to try to eliminate that risk exposure by taking an opposite position in one or more hedging instruments.
Speculation: It occurs when someone, who wants to take advantage of his personal appreciation of the market may speculate on changes sensed, thereby creating an exhibition where none existed before, supported by the fact that the main fruits of financial innovation, financial derivatives; are characterized by a high degree of leverage, they offer the ability to combine complex strategies and create exhibitions otherwise impractical.
Arbitration. Given the mathematical relationships linking the prices of comparable financial instruments offer the possibility of tighter margins when market prices are out of line checked or set.
Structuring. Financial engineering can be used to restructure the characteristics of a particular transaction or exposure.
HOW CAN WE DETERMINE FINANCIAL ENGINEERING
There are many explanations have been provided to justify the significant development of financial engineering in the last thirty years, among which we highlight:
- The passage of floating exchange rates: significant fluctuations in exchange rates after the collapse of Bretton Woods, accompanied by the existence of high inflation. All this leads to increased volatility in the interest rate and the exchange rate, with growing uncertainty, its evolution and the need for coverage.
- Computers and information technology, with enough agility and reliability for use in financial markets, with rapid transmission of contributions, making markets more perfect.
- Innovation and global economic growth, with the growing internationalization of financial markets, overcoming the barriers created by the systems of the capital control.
- Regulation and deregulation of financial markets, overcoming the barriers created by governments from two perspectives: in his capacity of generating financial innovations, given the need to search for new avenues of funding to meet the public deficit, and in his capacity Private indirectly inducing innovations through the legislative route.
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