Define the term “Financial Engineering” and explain 3 main components of financial engineering.

Advanced Financial Management Block Revision Mock Exams

Financial Engineering
• Design, development and implementation of innovative financial instruments and processes and the formulation of creative solutions to problems in finance.

It is concerned with three critical issues:
• Securities innovations which would add value to the firm and shareholders e.g issue a security which increases the present value of tax shields available to the issues without increasing the investors tax liability.
• Innovative financial processes e.g on-line banking, use of central depositing system (CDS) in stock market trading to reduce transaction costs etc.
• Creative strategies to corporate finance problem.
• Involves the use of tax-effective cash management strategies and corporate restructuring due to internal and external factors e.g leveraged buyout, sale and lease back, outsourcing of financial services, project finance etc.

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