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An Overview of

Financial Engineering
Financial Engineering
Financial Engineering
Financial Engineering
Financial Engineering
Financial Engineering
Financial Engineering
Financial Engineering
Financial Engineering
Financial Engineering
Financial Engineering
Financial Engineering

Financial Engineering

Financial Engineering
Financial Engineering
Financial Engineering

Quantitative Finance:

crude, mostly analogies, approximate all the time but possibly and hopefully useful

approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance
approximate all the time but possibly and hopefully useful  The basics* • Theorem 1: Finance

The basics*

Theorem 1: Finance is an applied field.

Proof: {Journals: “finance” “theoretical”title}≈

Corollary: Pure math, physics, chemistry, and molecular biology are beautiful.

Finance is usually complex.

Theorem 2: {Jobs in finance: You are paid solely for solving math problems}≈

Proof: Just try it.

Corollary: Technical skills are not enough. Communication/presentation skills are crucial.

Theorem 3: {Well-defined practical finance problems with closed-form solutions}≈

There is never a textbook answer to a finance problem

In any job you’re likely to hold, you’ll be paid mainly for exercising judgment.

This is true in financial modeling of all sorts.

*Prof. Joel Hasbrouck, Stern NYU,

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Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”

Job Description: Financial “Engineering”

Job Description: Financial “Engineering”
Job Description: Financial “Engineering”
Job Description: Financial “Engineering”

the application of science-based mathematical models to decisions about saving, investing, borrowing, lending, and managing risk

the study of how to create functional financial devices that

perform in desired ways, not just at expiration, but throughout their lifetime.

Financial knowledge

Business knowledge

Mathematics

Statistics

Computation

Emanuel Derman

 Financial knowledge  Business knowledge  Mathematics  Statistics  Computation  Emanuel Derman 1-3

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Who caused our Financial Crisis?

Who caused our Financial Crisis? The equation is simple.  Single Education (MBA/Engineering) = Ego (I

The equation is simple.

Single Education (MBA/Engineering) = Ego (I can do nothing wrong). Double education (MBA + Engineering) = Super Ego (I’m doing everything right). Greed = I, me, myself! Double education + Greed = I’m doing everything right…for myself!

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Career Opportunities in

Finance
Finance
Finance
Finance
Finance
Finance
Finance
Finance
Finance
Finance
Finance
Finance
Finance
Finance
Finance
Finance
Finance
Finance
Finance
Finance
Finance
Finance
Finance
Finance
Finance
Finance

Finance

Finance
Finance
Finance

Money and capital markets

Corporate Finance

Investments/ Portfolio Management

Trading/Sales

Risk Management Financial Regulation

Responsibility of the

Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst
Financial Analyst

Financial Analyst

Financial Analyst
Financial Analyst
Financial Analyst

Maximize stock value by:

Forecasting and planning

Investment and financing decisions

Coordination and control Transactions in the financial markets

Managing risk

Role of Finance in a

Typical Business Organization Board of Directors President VP: Sales VP: Finance VP: Operations Treasurer
Typical Business Organization
Board of
Directors
President
VP: Sales
VP: Finance
VP: Operations
Treasurer
Controller
Credit Manager
Cost Accounting
Inventory
Financial
Manager
Accounting
Capital
1-7
Budgeting
Tax Department

Director

Financial Management Issues

of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium

of the New Millennium

of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium
of the New Millennium

The effect of

changing

technology

The globalization

of business

Management Issues of the New Millennium  The effect of changing technology  The globalization of

Percentage of Revenue and Net Income

from Overseas Operations for 10 Well- Known Corporations, 2001 Company % of Revenue from overseas
from Overseas Operations for 10 Well-
Known Corporations, 2001
Company
% of Revenue
from overseas
% of Net Income
from overseas
Coca-Cola
60.8
35.9
Exxon Mobil
69.4
60.2
General Electric
32.6
25.2
General Motors
26.1
60.6
IBM
57.9
48.4
JP Morgan Chase & Co.
35.5
51.7
McDonald’s
63.1
61.7
Merck
18.3
58.1
3M
52.9
47.0
Sears, Roebuck
10.5
7.8
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Alternative Forms of Business

Organization
Organization
Organization
Organization
Organization
Organization
Organization
Organization
Organization
Organization
Organization
Organization
Organization
Organization
Organization
Organization
Organization
Organization
Organization
Organization
Organization
Organization
Organization

Organization

Organization
Organization
Organization
Organization
Organization
Organization

Sole proprietorship

Partnership

Corporation

Sole proprietorships &

Partnerships
Partnerships
Partnerships
Partnerships
Partnerships
Partnerships
Partnerships
Partnerships
Partnerships
Partnerships
Partnerships
Partnerships
Partnerships
Partnerships
Partnerships
Partnerships
Partnerships
Partnerships
Partnerships
Partnerships
Partnerships
Partnerships
Partnerships
Partnerships
Partnerships
Partnerships

Partnerships

Partnerships
Partnerships
Partnerships

Advantages

Ease of formation

Subject to few regulations No corporate income taxes

Disadvantages

Difficult to raise capital

Unlimited liability

Limited life

Corporation
Corporation
Corporation
Corporation
Corporation
Corporation
Corporation
Corporation
Corporation
Corporation
Corporation
Corporation
Corporation
Corporation
Corporation
Corporation
Corporation
Corporation
Corporation
Corporation
Corporation
Corporation
Corporation

Corporation

Corporation
Corporation
Corporation
Corporation
Corporation
Corporation

Advantages

Unlimited life

Easy transfer of ownership Limited liability

Ease of raising capital

Disadvantages

Double taxation

Cost of set-up and report filing

Factors that Affect the Level

and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows

and Riskiness of Cash Flows

and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows
and Riskiness of Cash Flows

Decisions made by financial managers:

Investment decisions

Financing decisions (the relative use of debt financing)

Dividend policy decisions

The external environment

Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment

Key Obstacles to Climate Investment

Key Obstacles to Climate Investment
Key Obstacles to Climate Investment
Key Obstacles to Climate Investment

Higher Upfront Costs

Private Sector Participation
Private Sector
Participation

Insufficient

Returns

Excessive

risk

Insufficient access to financing

Climate Finance Investment

Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance

Financial Engineering: Innovative Finance

Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance
Financial Engineering: Innovative Finance  Innovative Finance  Generate additional funds • New funding sources

Innovative

Finance

Engineering: Innovative Finance  Innovative Finance  Generate additional funds • New funding sources •

Generate additional funds

New funding sources

Solidarity taxes

Emerging donors

Institutional investors

Enhance efficiency of flows

Reduce delivery time and costs

Frontloading of development aid

Index-based risk financing

Link flows to results

Results-Based Financing

Advance Market

Commitments

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Innovative Climate Finance Approaches Grants Concessional Technical Debt Leverage Assistance Equity
Innovative Climate Finance Approaches
Grants
Concessional
Technical
Debt
Leverage
Assistance
Equity
Credit
Blending
Enhancement
Technology
Combined Finance
Transfer
Revenue
Alternative source
Enhancement
of financing for SMEs
1-16
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”
“Success is not final, failure is not fatal: it’s the courage to continue that counts”

“Success is not final, failure is not fatal:

it’s the courage to continue that counts”

- W. Churchill