Экономические науки/3. Финансовые отношения
Belyaeva V. Y., postgraduate student
Simon Kuznetz Kharkiv National University of Economics, Ukraine
Theoretical approaches to defining the
essence of the concept of "financial engineering"
The globalization of the world
financial markets, intensification of international economy links, complicating
of forms and increasing of risk in
financial operations are the tendencies which characterize the contemporary
status of the international financial system. The permanent development of
financial relationships require a quick reaction from all the branches of
financial system to the changes of their activities to balance profitability
and riskiness of financial operations and to structure cash flows. These
tendencies actualize an issue as to the modernization of the existing schemes
of making financial agreements by way of creating and introducing of innovative
financial instruments and technologies within the framework of financial
engineering.
A lot of works written by western
scientists of theory and practitioners such as Adutwum O. [1],
Beder S. [2],
Birge R. [3],
Bloss M. [4],
Bodie Z [5],
Drake P. [6],
Ferguson R. [7],
Finnerty J. [8],
Iba H. [9],
Hoda A. [10],
Lyuu Y. [11],
Marshall J. [12],
Taniguchi M. [13],
Tufano P. [14],
Zopounidis C. [15],
Vorob'ova Z. [15], Kapelinskiy Y. [17], Sohatskaya O. [16] are devoted to the issue of researching the essence
of financial engineering.
Although at present there is no
single approach towards highlighting the meaning of the economic category
'financial engineering'. This relates both to western economic thought and
domestic scientists. Insufficient theoretical grounds of the financial
engineering hampers economic agents from its successful application in the
domestic financial practice.
Therefore, the goal of this research
is to analyze definitions of the financial engineering proposed by western
economists with the help of morphological analysis and specify the
concept of this term.
Thus, in foreign economic literature
there exist different approaches as to discovering the essence and content of
financial engineering (tab. 1).
Table 1
Various definitions of the term of
"financial engineering"
|
№ |
Author/Source |
Definiton |
|
1 |
Finnerty J. [8, P. 443] |
Designing financing mechanisms to cope with “troublesome” regulations. |
|
2 |
Marshall J. [12, P. 79] |
Financial engineering - the use of financial instruments, such as
derivatives, to obtain a desired mix of risk and return characteristics. |
|
3 |
Beder S. [2, P. 20] |
Financial engineering may be broadly defined as the development and
creative application of innovative financial technology |
|
4 |
Bloss M. [4, P.
3] |
Financial engineering fundamentally refers to the development of new
financial solutions |
|
5 |
Zopounidis C. [15, P. 7] |
Financial engineering comprises several different aspects of financial
management including financial risk management but it is not restricted to
it. |
|
6 |
Taniguchi M. [13, P. 1] |
Financial engineering - the field of finance which involves economics,
mathematics, probability theory, statistics, operation research, etc. |
|
7 |
Iba H. [9, P. 61] |
Financial engineering is the term used to describe the use of engineering
and mathematical methods and tools to solve financial problems. |
|
8 |
Hoda A. [10, P. 22] |
Financial engineering is the emergence
of a new funding pattern differs from the traditional funding in
vision of the risk levels in investments need funding |
|
9 |
Bodie Z [5] |
Financial engineering is the application of science based mathematical
models to decisions about saving, investing, borrowing, lending and managing
risk |
|
10 |
Ferguson R. [7] |
Financial engineering has both created new opportunities and posed new
challenges for the securities and accounting industries |
|
11 |
Lyuu Y. [11, P. 1] |
Structuring financial instruments to target investor preferences or to
take advantage of arbitrage opportunities. |
|
12 |
Birge R. [3, P. 3] |
Financial engineering is an interdisciplinary field focusing on
applications of mathematical and statistical modeling and computational
technology to solve problems in the financial service industry. |
|
13 |
Tufano P. [14, P. 125] |
Financial engineering - the use of derivatives to manage risk and create
customized financial instruments—can advance a company’s strategic goals
might contradict the impression one gets from recent stories in the press |
|
14 |
Adutwum O. [1] |
Financial engineering is the application of mathematics, and computer
programming skills to solve solutions to certain problems in Finance. |
|
15 |
Drake P. [6] |
Financial engineering is the use of financial instruments such as
forwards, futures, swaps, options, and related products to restructure or
rearrange cash flows in order to achieve particular financial goals,
particularly the management of financial risk |
|
16 |
Kapelinskiy Y. |
The designing of new financial products and services that are used by
financial institutions to reallocate financial resources, risk, liquidity,
income and financial information in accordance with customer needs and
changes in the macro- and microeconomic situation |
|
17 |
Sohatskaya O. |
The development of various financial innovations, primarily for effective
risk management and additional income |
|
18 |
Vorob'ova Z. |
The process of designing innovative financial products to meet specific
consumer interests arising by external and internal factors, the main aim of
which is to form the desired cash flow, combined with the best possible
combination of risk, return and liquidity of the created product that ensures
competitiveness |
Shown in table 1 the definitions of
" financial engineering" characterize this economic category from
different sides: as the process of creation of innovative financial instruments
(Finnerty J. [8], Bloss
M. [4]), use
of the derived financial instruments to control the risk of the operation
(Marshal J. [12], Tufano P.
[14]), the
practical use of the economic-math analysis for solving the issues of regulation
of financial difficulties (Taniguchi M. [13], Birge J. [3]). Thus,
the lack of the integral approach towards the understanding of the essence of
this term makes it difficult to determine its basic properties and
characteristics, which in turn limits its practical use.
The analysis of foreign literary
sources in terms of having differences in defining the term 'financial
engineering' is aimed at forming the necessary basis for the specification of
the above-mentioned category. For solving this task the author used the method
of the morphological analysis which lies in the structuring of each definition
into the following composite parts: the key word, the specification of the
term, the goal within the term. Morphological analysis facilitates highlighting
the keywords and their definitions which reveal the content of the category in
the full sense.
The results of the morphological analysis
of the definitions of the term 'financial engineering' (tab. 1) are shown in
table 2.
Table 2
Morphological analysis of
definitions of "financial engineering"
|
№ |
Key word |
Concrete definition |
The goal in the framework of definition |
|
1 |
designing |
financing mechanisms |
to cope with “troublesome” regulations |
|
new financial products and services |
reallocate financial resources, risk, liquidity, income and financial information
in accordance with customer needs and changes in the macro- and microeconomic
situation |
||
|
innovative financial products |
form the desired cash flow, combined with the best possible combination
of risk, return and liquidity of the created product that ensures
competitiveness |
||
|
2 |
the term |
used |
to describe the use of engineering and mathematical methods and tools to
solve financial problems |
|
3 |
the use |
financial instruments |
to obtain a desired mix of risk
and return characteristics |
|
financial instruments |
to restructure or rearrange cash flows |
||
|
derivatives |
to manage risk and create customized financial instruments |
||
|
4 |
development |
innovative financial
technology |
- |
|
new financial innovations |
to form the desired cash flow, combined with the best possible
combination of risk, return and liquidity of the created product that ensures
competitiveness |
||
|
new financial
solutions |
- |
||
|
5 |
- |
comprises several different
aspects of financial management |
- |
|
6 |
the field of finance |
involves economics, mathematics,
probability theory, statistics, operation research, etc. |
- |
|
focusing on applications of mathematical and statistical modeling and
computational technology |
to solve problems in the financial service industry |
||
|
7 |
the emergence |
of a new funding pattern |
- |
|
8 |
the application |
of science |
- |
|
innovative financial
technology |
- |
||
|
of mathematics, and computer programming skills |
to solve solutions to certain
problems in finance |
||
|
9 |
- |
has both created new opportunities and posed new challenges for the
securities and accounting industries |
- |
|
10 |
structuring |
financial instruments |
to target investor preferences or
to take advantage of arbitrage opportunities |
Having structured the definitions of
the term 'financial engineering' with the help of the instruments of
morphological analysis (tab. 2) the following definition of this term was formulated.
Financial engineering is the process of development and using of the innovative
mechanisms, technologies, instruments and solutions to solve the problems in
the systems of financial management and achieve the specific financial goals
(balancing the profitability and risk of the financial operation, restructuring
the cash flows, etc).
To sum up all the above-mentioned
it's possible to make a conclusion that the main function of the financial
engineering as an effective instrument of response is the support to the
adaptation of a separate part of the financial system and its subject to the
macroeconomic situation by means of introducing the innovations into the
financial processes. Definition of financial engineering that was specified can
create the foundation for improving the financial management of economic agents
due to the definition of financial goals and the development of innovative tools,
technologies and mechanisms to achieve them.
The further study and profound
analysis require also some other theoretic and practical aspects of financial
engineering, in particular the introduction and use of the financial
engineering in different segments of the financial market.
References
15.
Zopounidis
C. Intelligent decision aiding systems based on multiple criteria for financial
engineering / C. Zopounidis, M. Doumpos. - Dordrecht: Kluwer Academic
Publishers, 2000. - 219 p.
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18. Капелинский Ю. И. Финансовый инжиниринг с использованием ценных бумаг: дис. канд. экон. наук: спец. 08.00.10 "Финансы, денежное обращение, кредит" / Ю.И. Капелинский. – М., 1998. – 129 с.