This slides deals with financial engineering. It is an innovative financial service. it also deals with different financial services rendered by the forex and domestic market.
2. MEANING
Financial engineering is a financial innovation.
It contains the design, development and the implementation of innovative
financial instruments and processes and the formulation of creative solutions to
problems in finance.
It also refer as the use of mathematical techniques to solve financial problems.
It emerged to satisfy the financial needs of companies and investors.
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3. Innovative financial services
Merchant banking Leasing
Mutual funds Factoring
Forfaiting Venture capital
Loan syndication Custodial services
Corporate advisory services Securitisation
Derivative securities New products in forex markets
Lines of credit (LOC)
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4. Merchant banking
It is skill oriented professional service provided by merchant banks.
Provides wide range of activities:
Portfolio management
Marketing and underwriting of IPO’s
Project counselling
Advisory services
Merger and acquisition related services
Insurance services
Investment banking etc;
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5. Leasing
It is a contract where the owner of an asset grants to another party to use of an
asset over a specified period of time for a predetermined amount of payment.
The owner of the asset is called as lessor and the other party is called lessee.
Finance lease provides the assistance the user of the asset.
Leasing company buys the asset for the user and rents it to them for a period
agreed upon.
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6. Mutual funds
It is an innovative financial tool used to pool the money from the small investor
and to invest it in securities like stocks, bonds, money market instruments and
other financial assets.
It is a trust of public members.
It refers to a fund raised by a financial service company by pooling the savings of
public.
It is invested in a diversified portfolio in order to reduce the risk.
Annual charges for the mutual funds are known as expense ratios.
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7. Factoring
It is a facility offered by a financial service company which is the process of
managing sales ledger of the client.
Mostly it deals with the sale of account receivables to a third party at a discount.
The financial intermediary assumes the credit risk in the collection of book debts
to its clients.
The financial service company is also called factors.
The responsibility on the collection of book debts belongs to the financial service
company.
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8. Forfaiting
Is a method of which provides medium-term funds for a business involved in
international trade.
It is the process of discounting the export bill and pay ready cash to the exporter.
The financial agency is called forfeiter. They are mostly financial institutions, banks,
trading companies, or trading underwriters.
The exporter is protected against the risk of nonpayment of debts by the
importers.
This facility is mostly experienced by the companies engaging in export of capital
goods.
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9. Venture capital
It is a long term risk capital.
It aids the entrepreneurs both financially and managerially to pool the resources
by venture capitalists.
It assist the projects which have strong growth potential and that involves risk.
Venture capital assistance provides at the earliest stages of the project.
Whenever it reaches the stage of profitability the venture capitalists sell their
equity holdings at a high premium.
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10. Loan syndication
It is the arrangement of loan by the lead manager for a borrower.
The borrower may be corporates or government department.
The lead manger must a merchant bank.
A group of lenders collaborate under lead manager because one single bank can’t
meet the need of borrower.
It also enable to share the credit risk which is associated with the loan.
There is no need of separate agreement between each member bank and the
borrower.
There is no need of equal participation by the member banks.
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11. Custodial services
It provides an agency service like safe keeping of shares and debentures,
collecting of interest and dividend and reporting of matters.
Here a financial intermediary primarily provide services to its clients.
The clients are particularly foreign investors.
The services are provided for a prescribed fee.
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12. Corporate advisory services
Banks are mostly the financial intermediaries.
To render exclusive service to the corporate customers, the banks have set up this
services in the branch.
It is an umbrella term.
It encompasses specialized assistance to corporate customers to professional
advisers.
The advisors may be accountants, investment banks, law practitioners and host of
similar service providers.
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13. Securitisation
It is a financial arrangement by which a bank or a company convert its illiquid
assets as a marketable security.
The marketable security is backed by an asset(equity or debt).
The marketable securities sells to investors.
It can be the pooling of contractual debts.
The company holding the asset is called as originator.
The products with more riskier underlying asset will gain more profit.
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14. Derivative security
Derivative is a financial instrument those value is derived from an underlying asset.
It is a set between two or more parties that can trade on an exchange or over the
counter(OTC).
fluctuation of the underlying asset determines price of derivatives.
It is mainly used to hedge the risk.
It is usually leveraged instruments.
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15. New products in forex market
There are lot of innovative financial products emerged in the forex market.
Forward contract: foreign currency is delivered at a future date for a specific price. It
may have a fixed or flexible maturity period. If the contract is not honored, there will be
some penalty.
Options: The buyer of the option has a right to buy of sell a fixed amount of currency
against another currency at fixed rate on a future date according to his option.
Futures: agreement buy or sell foreign currency at a future date at an agreed price on
the stock exchange. There is an obligation to buy or sell foreign currency on a future
date at a specified rate.
Swaps: a financial intermediary buys and sells a foreign currency simultaneously for
different maturity dates.
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16. Lines of credit(LOC)
It is the agreement of a financial institution of one country with another
agent/bank/institution to support the export of goods and services.
It helps the exporters to get the payment immediately the goods are shipped.
The funds would be paid out of the pool account with the financing agency or
importer.
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