Financial engineering is the practice of developing new strategies for investment. Professionals who practice financial engineering may use principles from mathematical disciplines, such as probability, computer engineering, and finance theory to create new instruments with more complex features or new investment packages that can offer investors unique options. To some degree, this financial practice can be found in nearly every kind of industry. It is most common, however, in the banking industry as well as in the manufacturing industry.
A common goal of all financial institutions, such as banks, is to gather money from clients to invest in a variety of financial instruments. Banks benefit most when they use investment strategies that allow them the highest returns with the lowest degree of risk. Financial engineering is used often in this industry because bank managers normally are interested in analyzing and possibly implementing strategies that increase their business's overall value.
In the manufacturing industry, a company depends on the value of its assets. Intangible assets, such as investments, can greatly impact a company's financial status in terms of credit and worth. Manufacturing companies with greater capital asset worth often find it easier to receive lines of credit. A line of credit provides cash flow that allows them to purchase equipment and hire labor to produce their goods.
Corporations that provide services for clients also use financial engineering. Consultant firms and retailers often invest to increase the worth of their operations. As in manufacturing, service industry corporations also depend on cash flow to operate. When a manager or executive increases the worth of his or her organization, he or she has more access to capital.
As a general rule, organizations with complex investment strategies can employ the help of financial engineering professionals. Smaller businesses with limited investment interests normally cannot benefit from these techniques unless they plan on drastically changing financial strategies. Companies that have budgets for high overhead costs can employ in-house financial engineers. These are professionals who focus solely on developing new strategies for a particular organization by using innovate mathematical disciplines, such as calculus and probability.
Companies that are interested in learning about how they can benefit from financial engineering strategies without the budget to hire full time analysts often hire consultants or advisers. These professionals normally analyze a company's portfolio and introduce managers to new financial products. If performed correctly, financial engineering can provide financial managers with new perspectives on investing that ensure financial stability while increasing returns on investments.