BBI-Fsm-Financial intermediation and financial engineering

Financial Intermediation:

by issuing their own instruments and then using the funds to buy primary securities. It is

a sort of indirect financing in which savers deposit funds with financial institutions rather

than directly buying bonds and the financial institutions, in turn, lend to the ultimate

borrowers.

Financial intermediaries are in a better position than individuals to bear and spread the

risks of primary security ownership. Because of their large size, intermediaries can

diversify their portfolios and minimize the risk involved in holding any security. They

employ skilled portfolio managers, posses expertise in evaluation of borrower credit

characteristics and take advantage of economies in large sclae buying and selling.

Financial Intermediaries are firms that provide services and products that customers may

not be able to get more efficiently by themselves in the financial market. A good example

of a financial intermediary is a mutual fund, which pools the financial resources of a

number of people and invests in a basket of securities.

it involves financial institutions acquiring funds from the public

Financial Engineering:

implementation of innovative financial instruments and processes and the formulation of

creative solutions to problems in finance. Financial Engineering lies in innovation and

creativity to promote market efficiency. It involves construction of innovative asset-liability

structures using a combination of basic instruments so as to obtain hybrid instruments

which may either provide a risk-return configuration otherwise unviable or result in gain

by heading efficiently, possibly by creating an arbitrage opportunity. It is of great help in

corporate finance, investment management, money management, trading activities and

risk management.

Over the years, Financial Mangers have been coping up with the challenges of changing

situations. Different new techniques of financial analysis and new financial instruments

have been developed. The process that seeks to adopt existing financial instruments

and develop new ones so as to enable financial market participants to cope more

effectively with changing conditions is known as financial engineering.

In recent years, the rapidity with which corporate finance and investment finance have

changed in practice has given birth to a new area of study known as financial

engineering. It involves use of complex mathematical modeling and high speed

computer solutions. Financial Engineering refers to an includes all this. It also involves

any moral twist to an existing idea and is not limited to corporate finance. It has been

practised by commercial banks in offering new and tailor made products to different types of customers. Financial engineering has been used in schemes of merges and
acquisitions.
The term financial engineering is often used to refer to risk management also because it
involves a strategic approach to risk management.‘Financial Engineering’ involves the design, development and