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Financial Engineering

Financial Engineering is the application of mathematics and computer programming skills to solve certain problems in finance drawing on tools of statistics, economics, computer science and applied mathematics.

Investment banks, commercial banks, insurance companies, corporate treasuries and regulatory agencies employ financial engineering in USA, Britain and other countries with robust financial markets.

-What is financial engineering.
-What are credit default swaps and their role in the financial crisis/near collapse of 2008?
-Describe the roles of investment bankers, commercial banks, bond credit rating agencies, and Congressional Legislation in the crisis.
-Describe the impact on this entire scenario of the Community Reinvestment Act of 1977.
-Describe what financial leverage is, and its role in leading up to the collapse.
-Describe how investment and commercial banks apply the methods of financial engineering to problems such as (i) new product development, (ii) derivative securities valuation, (iii) portfolio structuring, and (iv) risk management.

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Financial Engineering
Financial engineering is the method, which helps organization in calculation and determination of financial records and data. This method includes computer science, statistics, economics and applied mathematics to deal with financial issues and development of new financial products. At the same time, if organizations take technical tools to resolve financial problems then there is a huge use of financial engineering. An assessment of any computer program in a bank to store and analyze organizational performance. This analysis can be used for qualitative and quantitative research among organization (Stulz, 2010). In terms of quantitative analysis, commercial banks, investment banks, insurance agencies and hedge funds.

Credit Default Swap and 2008 Crisis
Default Swap (CDS) is an agreement or financial instrument, which is used by seller and buyer to compensate the event of loan or other credit event. In other words, CDSs are mutual type of contract, which is developed between two parties. In the most situations, this agreement is used for managing counterparty risk. It is like financial derivatives, which make credit risk easier for those, who are in the best position to bear. CDS enables financial reveal information about credit risk and potential price risk as well. CDS have existed since 1990s, increase in use after 2003. By the end of 2007, the amount of CDS reaches the level of $62.2 trillion but in the mid of 2010 it falls the value and become $26.3 trillion (Moseley, 2009).

As per the Credit default swap remains for loan holder as security for a long time. But, some of assumptions reveal that the crisis of 2008 was get worse due to Credit Default Swap. Lehman Brother bankrupted due to the credit default that is occurred after the making of corporate bound with Washington Mutual in 2005. The bound was made with mutual agreement but when Lehman Brother get bankrupted the CDS was ...

Solution Summary

The financial engineering applications of mathematics and computer programming skills to solve certain problems are examined.