Financial Engineering Problems during the Financial Crisis

By

ACKNOWLEDGEMENT

I would like to take this opportunity to thank my dissertation supervisor who has always shown confidence in me. He has offered his patience, remarks, propositions and understanding. Here I would also like to mention my parents who have always believed in me for all my hard work. My family, including my parents, brother and sister has endlessly supported me during my life and academics. This has helped me in making positive decisions for my life. I would also mention my peers and co-workers and appreciate their collaboration and expert advice on every circumstance. I am also grateful towards my University and my Department, the administrators, faculty members and fellow students for their support throughout this study.

DECLARATION

I [type your full first names & surname here], declare that the following dissertation/thesis and its entire content has been an individual, unaided effort and has not been submitted or published before. Furthermore, it reflects my opinion and take on the topic and is does not represent the opinion of the University.

Signature:

Dated:

ACKNOWLEDGEMENTi

DECLARATIONii

CHAPTER 1: INTRODUCTION5

Background5

Problem Statement5

Purpose of the Research5

Significance of the Research6

Research Questions6

Summary6

CHAPTER 2: LITERATURE REVIEW7

Background of the Study7

The Financial Crisis of 20077

Financial Engineering8

Link between Financial Engineering and Financial Crisis8

Perfect Markets9

Efficient Market10

Rational Markets10

Complete Markets10

Information and Market Inefficiency: Application of Theories10

Reasons11

Expected Prices and Volatility11

Financial Markets: Liquidity, Arbitrage and Speculation11

Importance of Financial Engineering in Financial Institutions14

Risk Management by Financial Engineering during Financial Crisis15

Securitization15

CDS16

Derivatives16

Portfolio Optimization in the Management of Financial Crisis16

CHAPTER 3: METHODOLOGY18

Research Approach18

Literature Search18

Reliability and Validity18

GANTT CHART20

CHAPTER 4: ANALYSIS21

Securities Pricing21

Risk Management22

Portfolio Optimization24

CHAPTER 5: CONCLUSION25

REFERENCES27

CHAPTER 1: INTRODUCTION

This chapter will discuss the concept of financial engineering and will also talk about its role in the financial crisis. It is important for the financial people to learn and know about as to how financial engineering can avoid problems and what steps they can take during the financial crisis in order to make sure that the companies and the market does not get negatively impacted by this crisis. Problems related to the handling of the financial crisis with the help of financial engineering will also be discussed.

Background

Financial crisis has hit the world in a negative manner and has left a huge mark on the economies of the different countries. Financial engineering is a new concept which has emerged as a means of applying and implementing different methods in the field of finance. Financial engineering is a blend of finance, mathematics and statistics which is used in different areas and aspects of doing business and in the field of finance.

This ensures that the people in this field apply the different computation methods that are present in order to get rid of the problems that the companies and the overall economy is facing due to the financial crisis. Favorable developments in the international economy in the recent years and according to the economic growth data that is available has led to the view that the economy is predictable and even understandable.

The irrepressible and sophisticated financial engineering as weighted by its unique structure and design and relaxed ...