The Business of Investment Banking

By K. Thomas Liaw | Go to book overview

13
Financial Engineering

Financial engineering is the investment banker's creativity successfully put into practice. The competition among investment banking professionals to meet the needs of borrowers and investors—such as hedging, funding, arbitrage, yield enhancement, and tax purposes—drives the explosive growth in the structured and derivatives markets. The development of the junk bond and asset-backed markets provides borrowers additional funding sources at lower costs. Structured notes add another dimension in the funding and investment spectrum. Transactions in repurchase agreements provide borrowers lower funding costs and give lenders legal title to the collateral. Through swap contracting, borrowers and investors obtain a high degree of flexibility in asset-liability management at better terms. Credit derivatives are the new trend with widespread applications. This chapter first provides an illustration of the financial engineering process, from why to how and to the end results. Subsequent sections cover the most widely used products and the new trend in the derivatives markets.


OVERVIEW

Financial engineering is the successful implementation of the investment banker's creativity in security design. The rapid pace of financial innovation is driven by the competition among investment bankers in response to increased price volatility, tax and regulatory changes, demand for new funding sources, arbitrage, and yield enhancement. The application of mathematical and statistical modeling, together with advances in computer technology, provides the necessary infrastructure for financial engineering. The notional principal of swaps and related derivatives outstanding worldwide grew from $3.45 trillion in 1990, to $25 trillion by 1996, and to more than $29 trillion in 1997. Table 13–1 lists volume summary of derivative market data from 1990 to 1997.

Since 1991, many banks and investment banks have created AAA-rated derivatives subsidiaries. These subsidiaries and vehicles with guaranteed pool of collateral offer them as more acceptable counterparties for derivative transactions in order to gain access to the world's most select clients. The 1998 Institutional Investor poll ranked J.P. Morgan, Citicorp, Chase Manhattan, Deutsche Morgan Grenfell, and Union Bank of Switzerland the top dealers in interest-rate derivatives. In foreign exchange derivatives,

-222-

Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this book

This book has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this book

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this page

Cited page

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited page

Bookmark this page
The Business of Investment Banking
Table of contents

Table of contents

  • Title Page iii
  • Contents v
  • Preface vii
  • Acknowledgments ix
  • 1: Investment Banking in Global Capital Markets 1
  • 2: Venture Capital Markets 9
  • 3: Mergers and Acquisitions 27
  • 4: Stock Underwriting 47
  • 5: Underwriting Fixed-Income Securities 72
  • 6: Asset Securitization 94
  • 7: Foreign Listing on Wall Street 111
  • 8: Euromarkets and European Markets 125
  • 9: Japanese Securities Markets 148
  • 10: Emerging Markets 167
  • 11: Trading and Trading Techniques 185
  • 12: Repurchase Transactions 203
  • 13: Financial Engineering 222
  • 14: Money Management 241
  • 15: Clearing and Settlement 261
  • 16: Securities Regulation and Ethics 275
  • 17: Investment Banking Trends and Section 20 296
  • Chapter Notes 309
  • Glossary 315
  • Index 325
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen
/ 340

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.