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AGSIKAPANG PANANALAPI | Financial Engineering

tr|n|tytr|n|ty PExer
edited March 2019 in The Working Filipino #1
Prior to the Asian Stock Market Crash, i was interning(this was 3 years ago) with the Research division of the Philippine Stock Exchange and we were doing a lot of studies on different Equity products to be offered to the Philippine Market. We worked closely with the Financial Engineering Division of Citibank. I was just wondering if anything has happened in offering options, futures and other derivatives to the market? I remember distinctly that we were looking at put and call warrants.

With that long intro, anybody out there who are interested in Financial Engineering? Creating new products to be traded in the markets and not just "plain vanilla" or standard derivatives...

Examples are Standard Oil's Bond Issue, ICON or the Index Currency Option Notes(developed by Bankers Trust) or Range Forward Contracts. there are also weather, electriciy, insurance and credit derivatives, among others


  • CrusherCrusher PEx Influencer ⭐⭐⭐
    Financial Engineering?
    So is there a university or college offering this course now in the Philippines or just through seminars and classes in banks and financial institutions?
    How does one qualify?
    And how are the instruments you mentioned basically differ from one another? Aren't all of them some form of investments where a certain rate of interests are paid to the investors?
  • i wouldnt know if there's a course offering in the Philippines. I'm sure Columbia has one, so do Berkeley, Michigan among others

    what is financial engineering?

    Financial engineering is the process whereby a portfolio is designed and maintained in such a manner as to achieve specified goals. Financial institutions use financial engineering to create complex derivative instruments. That process may include the following steps:

    - Designing a derivative instrument which will appeal to one or more of the institution's clients
    - Developing a hedging strategy for the portfolio of assets or liabilities which will support that instrument
    - Pricing the instrument based upon the anticipated cost of the hedging strategy
    - Implementing the strategy once the instrument has been sold

    Financial engineering is often thought to require a great deal of mathematical sophistication. Indeed, much of financial engineering depends on advanced mathematical modeling of financial markets. Many simpler tasks, however, such as duration matching a fixed income portfolio or delta hedging a foreign exchange option, require less mathematical sophistication—but represent financial engineering nonetheless.
  • first of, let's start with basic terms

    derivatives-financial instruments whose value depends on the values of other, more basic underlying variables like foreign currency exchange rates, stocks, and even livestock or weather for that matter. Forwards, swaps and a variety of options are sold over the counter or by different financial institutions. Derivatives are also part of bond issues.

    basic examples of derivatives:
    1. Forward Contracts-it is an agreement to buy or sell an asset at a certain future time for a certain price
    long-allows you to buy
    short-allows you to sell
    2. Options are like forward contracts BUT it only gives you the right not the obligation to buy or sell a certain issue.
    put-you have the right to sell
    call-you have the right to buy
  • *binura kasi ang panget ng PEx eh* :D
  • I know that some top foreign banks in the Philippines did some fast-tracking of some of their professionals who are interested in the design and development of their financial products, segments of currency, hedging and financial risk management et cetera. I was also interested before, but that was the time when I was planning on shifting careers, so no thank you. Financial engineering does not only apply and deal with advanced mathematical methods and financial theories, but it is also involved in the application of computer technologies to financial markets and management, actually a cross-disciplinary field on finance, economics, physics, mathematics, engineering, computational science and emerging technologies. It is a relatively budding profession, and is now being offered in the US and some parts of Asia (not sure about the Philippines, though) as a Masteral course. :)
  • yup, SUX2BU. A professor of mine in college helped develop certain decision-end financial software in relation to financial engineering. I'm sure basic options classes are available in universities in the Philippines but i'm not too sure about the Masteral program. I know NUS is offering it, that's somewhat in the geographical area. a friend of mine who has a degree in Industrial Engineering is currently taking her MS in Financial Engineering in Columbia. I'm interested since i'm a big math buff(yes, a certified geek over here :nerd: ).

    SUX2BU, do you think the Philippines is ready for a wider variety of financial instruments?
  • double post. leche. :lol:
  • double post. leche. :lol:
  • triple post nga e.
  • SUX2BU, do you think the Philippines is ready for a wider variety of financial instruments?

    Aspects like foreign exchange, commodity, interest rates, weather (hey, there are instruments based on weather changes :D), credit, risk on capital market instruments et cetera should be factored in. With the economy as bad as the Philippine economy. Hmmm, i'm having doubts about that.

    What do you think? :)
  • By the way, own equity instruments, weather derivatives, financial guarantees, commodity contracts and intangible assets are not financial instruments. :)
  • i think there's a need to expand products offered in the market, you would be shocked with how many people are actually willing to get into investing because Filipinos are natural gamblers. as for non-financial instruments, i did mention a few like commodity contracts credit risk, weather and electricity in my first post...they are considered options and instruments for hedgers, speculators and abitrageurs.
  • Yeah, there's a need, but with the slump in the Philippine economy and industries, who would gamble now? Just look at the way FOREX is moving. Let's just say that probabilities of a ubiquitously profitable new market products are nil across any Philippine industry right now.
  • well developing them right now should be a good endeavor..launching is another story.
  • mac_bolan00mac_bolan00 PEx Veteran ⭐⭐
    Originally posted by tr|n|ty
    SUX2BU, do you think the Philippines is ready for a wider variety of financial instruments?
    if the question pertains to applicability of derivatives in the philippines, the answer is yes. it is indeed being applied here. if the question has more to do with the possibility if these intruments being traded by the public, than answer is no.

    actually, financial engineering is simply an application of the principles of corporate finance and economics. the math aspect is not even close to that of the "physical" engineering courses. of course, those so-called rocket scientists try to apply calculus and other multi-variate methods but it's mainly to impress the vast majority of finance professionals who don't even know how to set up an algebraic equation.

    when i was in the stock market, i used nothing more than moving averages and multiple regression for my time-series analysis.

  • aww...harsh words.

    but then again, looking back..i think a math degree with a econ minor would have been a great choice in college over my finance and econ.

    but anyways, i digress.

    mac_bolan00- so u don't think that derivatives are going to be publicly traded any time soon in the Philippines? why not?
  • mac_bolan00mac_bolan00 PEx Veteran ⭐⭐
    trading by the investing public has very little to do with the underlying soundness of the instruments being offered. quite simply, the fin-trading business is a crap-shoot. the traditional sectors, T-bills, forex and equities is currently moribund. hardly any volume. should there be a run-up similar to that in 1993, people should at least be wary. but then... in my experience, the stock market has a very short memory. so we'll see a lot of people crying in the lounges, in the elevators and possibly jumping off the 30th floor should the market revitalize.

    no, dirivatives shouldn't be traded publicly. they should be used for their original intended purpose: to hedge against risks.

    p.s., i take it you view yourself a rocket scientist.
  • zimdudezimdude PEx Veteran ⭐⭐
    sorry for my layman's question:
    so how do banks, insurance companies, etc. keep their client's money intact, if not growing?
  • aticusaticus PEx Influencer ⭐⭐⭐
    Originally posted by zimdude
    sorry for my layman's question:
    so how do banks, insurance companies, etc. keep their client's money intact, if not growing?

    Layman's answer: They use that money to try to make more money. Some ways would include lending it to people at higher rates than their deposits (done by all banks) and/or investing in instruments that yield higher than the cost of "borrowing" the money in the first place.

    Banks and other groups "borrow" money from the public by offering them rates of deposit. They actually "loan" your money when you deposit with them, and the interest they give you is the "loan interest." :)

    Banks, by the way, are the ones most into financial engineering, as it is their business to make money with other people's money. They also have to use this model regardless of how good, or bad, the economy is at any given moment. This is why it is critical for them to do long-term financial planning.
  • mac_bolan00mac_bolan00 PEx Veteran ⭐⭐
    trinity's story:

    trinity makes chairs. one chair costs P 30 to make. With her P 120 and a P 10 mark-up per chair sold, she is able to make 4 chairs a year and profits P 40. well and good.

    just one thing. she knows she can sell 8 chairs a year if only she had P 240. so she goes around looking for people who would lend (or give) her another P 120.

    first stop, aticus. aticus is a venture capitalist. he has a sharp eye (being part-vulture) and knows a winner when he sees one. he offers to give trinity not P 120 but P 160. nice. what's the snag? aticus wants to end up owning the majority of pexchairs, inc. trinity leaves in a huff and gives aticus this kissoff: "you're the chubbiest vulture capitalist i've ever seen!"

    next stop, kuya danny. KD is a money lender: absolutely no interest in owning pexchairs (or owning trinity for that matter). P 120? easy. payable in 12 months at 5% a month and with the following conditions:

    1. trinity to either secure the loan with her P 240 flower pot (KD wants a 200% collateral coverage) or it could be a clean loan but...

    2. trinity had to open an account with KD and maintain an average daily balance of P 40 pesos.

    trinity runs the numbers and finds to her dismay that, given a lumpy sales pattern, credit sales and all of KD's conditions, her business won't be able to churn out cash to pay interest and principal on time. she walks out of KD's office coldly but makes a mental note to invite him to a cup of coffee one of these days.

    next stop, mac_bolan00. mac is an investment banker. trinity approached him accidentally because she needed to go to the powder room and mac happened to look (and sometimes act) like a janitor. mac juggled the figures trinity gave him, looked at aticus' and KD's offices in disgust, spat in those directions and said: even if you had P 240 for your very own, i wouldn't advise you to try selling 8 chairs a year. your money will just get tied up in receivables. 6 chairs is about right. you'll keep your receivables low and your selling price won't have to go down. that means you need only an additional P 60. he starts pointing to possible alternatives:

    1. mac could a form a loan sindicate composed of four money lenders. if they split the amount, they'll probably charge an average interest charge of only 1.1% a month, two months grace period on principal, and a monthly re-payment. collateral coverage had to be at least 100% with specific assignments to each syndicate member.

    2. offer to float P 60 in new equity, whether privately or on the stock market. mac advised against the stock market knowing that market was already heavy on issues soon to crack in this current state of the economy. those issues included scented candles, soaps, internet and cell cards, fake osama beards, and CHAIRS.

    so the prospect of a private placement looked good. no interest to pay, no principal repayment to worry about. trinity will not benefit when it comes to returns since the incremental earnings will become attributable to whoever puts up additional equity. but that didn't matter since she had no plans of increasing her take anyway. in fact, she wanted to reduce her own take and that of the prospective investors. the increase to 6 chairs will weaken her stongest competitor's position (delisyus recliners, inc.) all in all, trinity's business will end the year as the biggest chair-maker and with enough cash to target an 8-chair level the following year.

    she turns around to thank mac_bolan00 but finds him gone. also, she discovers too late that mac filched P1.8 from her wallet (equal to 3% of the float amount) and that he had pulled trinity's back zipper more than halfway down.
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