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7/27/2019 Lecture No.01 Introduction Financial_Engineering
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Abdur Rashid Mirza
University of Lahore
School of Accountancy and FinanceFinancial Engineering (Product and Services
of Islamic Financial Institution)
Lecture no.1
7/27/2019 Lecture No.01 Introduction Financial_Engineering
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Definition of Finance
A branch of economics concerned with resourceallocation as well as resourcemanagement, acquisition and investment.
Simply, finance deals with matters related to money and
the markets.Definition of Engineering
Engineering is basically the planning stage of
manufacturing something.
Definition of Finance + Engineering
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Financial engineering can be defined as
‘the design , development , and theimplementation of innovative
financial instruments and processes,
and the formulation of creativesolutions to problems in finance’.
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Definition of Financial
Engineering
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What is Financial
Engineering?This is done in order to maximize profits
using different combinations ofequity , futures, options, fixed income(Bonds), swaps (exchange).
They apply theoretical finance andcomputer modeling skills to makepricing, trading and portfolio management
decisions.
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Constructing (mathematical and
graphical) representation of economicand engineering manufacturing withthe help of computer system.
Computer Modeling
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Financial Engineers are
prepared for careers in:Investment Banking
Corporate Strategic
Planning
Risk Management
Primary and DerivativesSecurities Valuation
Financial InformationSystems Management
Portfolio Management
Security Trading
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Financial markets are becoming more and more sophisticated, and
competitive. In order toachievement the fast changing market environment and face
increasing competition , financialengineering and innovation isimperative.
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Need for Financial Engineering in
Islamic Finance
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Financial needs of both individuals
and businesses have changed.Engineers in modern finance have
designed several new ways such
as mortgages , options ,derivatives etc., to meet thoseneeds.
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Scope for Financial Engineering
in Islamic Finance
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Derivative instruments Contracts
such as options and futures whoseprice is derived from the priceof the original financial asset.
Derivative
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The scope for financial
engineering, and for that matterfor innovations in other fields ,is quite wide. It is important
that the task is given over tothose experts who know theneeds and facts of the trade.
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Scope for Financial Engineering
in Islamic Finance
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The Golden Principle of Free Choice
and the discussion of the few
prohibitions, we can summarize theguidelines for financial engineering in what
we call “Four Cs of Islamic FinancialEngineering”. These are:
Consciousness
Clarity
Capability
Commitment 12
The Four Cs of Islamic Financial
Engineering
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That the parties should consciously and
willingly agree on the conditions ofcontract without pressure. Animplication of this is that any agreementmade in the state of unconsciousness isnot valid.
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Consciousness
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That the parties are fully aware of all the
implications of the conditions laid down ina contract. Any ambiguity will make the agreement
invalid. An implication is to minimize uneveninformation.
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Clarity
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That the parties are reasonably certain that they are
capable of complying with all conditions of
the contract. An implication of this is that sale of any
goods (or services) which are not owned andpossessed by the seller at the time of the
contract is not valid.
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Capability
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That the parties intend and are
committed to respect the terms of acontract both in letter and spirit.
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Commitment