1、engineeringanalysisdescriptionThree Stages in any True Sciences EvolutionThree stagesFinance:The third stagesvFinance has passed through all of these stages arriving,finally,during the 1980s,at the engineering stage vThis transformation has created many challengesOutlines123a definition of financial
2、 engineeringa review of the evolution of financial engineeringa description of the role that information technology has played in that evolution4a discussion of a few of the challenges that the technology poses for managers,regulators,and policy makersFinancial Engineering Defined“the development an
3、d creative application of financial to solve financial problems and to exploit financial opportunities.”Processes:the sequence of steps and the act itself of formulating and implementing a solution by combining the relevant theory and instrumentsInstruments:include traditional financial instruments
4、and various short-term debt instrumentsTheory:the body of knowledge and the collection of ideas that have evolved to describe a disciplineWhat Constitutes Financial TechnologyThree fundamental componentsInformation Technology is Criticalv Financial engineering brings together these disparate pieces
5、of technology to formulate and implement creative solutions to seemingly intractable problemshardware and software,data transmissionThe Evolution of Financial EngineeringThe Evolution of Financial Engineeringv Before long,practitioners began to employ the new theory and the tools that grew from it i
6、n their portfolio selection and hedging strategiesIn 1952Harry Markowitzprovided the theoretical foundations of modern portfolio theoryIn the 1960sWilliam Sharpe and others developed the Capital Asset Pricing Model.The rudiments of hedging theory followedThe Evolution of Financial EngineeringIn the
7、1960sresearchersanalytical thinking and methodology slowly but surely replaced the more descriptive approach of earlier scholars and practitionersIn the 1960sRobert Merton provided much of the mathematical foundation for analytical financeIn 1973Fischer Black and Myron Scholes published the first co
8、mplete option pricing modelNew Financial Instrumentsv elemental derivatives:forward-like instruments option-like instrumentsv derivative securities:similar to more traditional instruments,like stocks and bonds,but contain a derivative component that is often called an“embedded”derivativeThe Evolutio
9、n of Financial EngineeringBy the late 1980ssome leading financial scholarsbegan to realize that finance,as a science,was undergoing a second fundamental transformationIn the late 1980sHayne Leland and Mark Rubinsteinbegan talking about the“new science of financial engineering.”By the early 1990s man
10、y cutting-edge finance practitionersbegan to see themselves in a new light and the term financial engineering began to appear in the trade literature(*)More in text(2)The Evolution of Financial Engineeringv The easiest way to understand the complex structures then is to decompose them into their com
11、ponent parts or building blocksText(2):Financial Engineering in Corporate Finance:An OverviewvReview:When did finance become ture science?By what?vJohn D.finnerty:Financial engineering involves the design,the development,and the implementation of innovative financial instruments and processes,and th
12、e formulation of creative solutions to problems in finance.Scope of Financial Engineeringcreative solutions to corporate finance problemsthe development of innovative financial processessecurities innovationThe definition of corporate financial engineeringThe Process of Financial InnovationMillerdes
13、cribes financial innovations as unforecastable improvements in the array of available financial products and processes that came into being as a result of unexpected tax or regulatory impulses.Silbercharacterizes innovative financial instruments and processes as at-tempts by corporations to lessen t
14、he financial constraints they face.Van Horneargues that in order for a new financial instrument or process to be truly innovative,it must enable the financial markets to operate more efficiently or make them more complete.notes the excesses that have resulted from the innovative processZero coupon b
15、ondsv Prior to the passage of the Tax Equity and Fiscal Responsibility Act of 1982(TEFRA),an issuer of zero coupon bonds could have amortized the original issue discount-the difference between the face amount of the bonds and their issue price-on a straight-line basis for tax purposes.11 categoriesv
16、tax asymmetries that can be exploited to produce tax savings for the issuer investors,or both,that are not offset by the added tax liabilities of the other;vtransaction costs;vagency costs;vopportunities to reduce some form of risk or to reallocate risk from one market participant to another who is
17、either less risk averse or else willing to bear the risk at a lower cost;11 categoriesvopportunities to increase an assets liquidity;vregulatory or legislative change;vlevel and volatility of interest rates;vlevel and volatility of prices;vacademic work that resulted in advances in financial theories or better understanding of the risk-return characteristics of existing classes of securities;11 categoriesvaccounting benefits(which may,and often do,have at best an ephemeral effect on shareholder wealth);vtechnological advances and other factors.
