Answer to Question #306841 in Finance for comfort

Question

a) Financial engineering has been disparaged as nothing more than paper shuffling. Critics argue that resources used for rearranging wealth (i.e, bundling and unbundling financial assets) might be better spent on creating wealth (i.e, real estate)

Evaluate this criticism. (15marks)

Answer 1

Evaluate this criticism

It is characterized as a multidisciplinary area that incorporates financial theory, engineering methodologies, programming tools, and practice.

Mathematical Finance and the process of computing various technological approaches are used in this application.

Financial engineering is similar to paper shuffling in that it is only a reorganization of wealth. Financial assets, such as stocks, bonds, and mortgages, have unique payment patterns, risks, and returns that have evolved over time.

Government bonds, for example, have a semi-annual coupon rate, and mortgage loans can be prepaid.

Treasury strips let the US government borrow money without having to worry about reinvestment risks; similarly, real estate owners may borrow money without having to worry about prepayment or default concerns.

Financial engineering products have a huge number of underlying assets, yet they will still be more valuable than underlying assets since they have a reduced risk factor.

Real assets, in the end, define an economy's material well-being. Individuals can gain when Financial Engineering develops new solutions that enable them to better manage their financial asset portfolios. Because bundling and unbundling financial assets generates new securities with varied risk sensitivity, it allows investors to more effectively hedge certain sources of risk.