The Elements of Financial Engineering


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–          Embodies the notion that there are a few elemental building blocks or financial contracts that can be combined in a rigorous fashion  to produce an almost unlimited variety of non-standard cash flow expectations.

–          Conceptually, the idea is that all familiar financial securities ca be thought of as having some combination of;

  1. Credit extension (such as loans, bonds, etc.)
  2. Price fixing (such as futures / forward contracts)
  3. Price Insurance (such as call / put options)

–          The invention of new or hybrid financial securities to fit exactly some requirement of an individual financial market participant is a matter of combining these elements into a package of claims that will produce a profile of cash flow expectations meeting this need.

 


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