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Financial Engineering and Its Relevance Report (Assessment)

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Updated: Jun 21st, 2020

Abstract

The purpose of this study is to investigate the relevance of financial engineering in improving financial management and resource allocations. While organizations presume to be involved in sound financial management, the majority still struggle with the financial decisions geared towards equitable allocation of resources to various projects within the departments of the organization. Appropriate decisions involving financial resources management can be achieved through the applications of tools that are within the scope of financial engineering. Hence, financial engineering remains a critical technique used in the financial resources allocation management and decisions. In fact, most organizations do not understand the relevance of financial engineering in the management of financial resources. Whether in the public domain or private sector, organizations need to incorporate the financial engineering in their resources management in order to attain the equitable resource allocation and meaningful use of the resources.

Introduction

Studies indicate that the majority of organizations do not acknowledge the need of financial engineering in their resources management (Marek & Tomasz, 2010; Cuthbertson & Nitzsche, 2001; Salih, 2008). While financial engineering has been found to be useful in the determination of how financial resources can be distributed within the firm, chief financial officers seldom apply its techniques and tools in the execution of the financial strategies (Vidyasagar, 2014). Besides, financial engineering have been found to be useful in the financial planning and budgeting processes (Marek & Tomasz, 2010). Salih (2008) argued that the application of financial engineering in the resource management planning process helps organizations identify risks that are associated with the resource allocation and use. Besides, the applications of financial engineering in the planning and budgeting processes enable the financial managers to identify weak areas within projects that need extra resources (Salih, 2008). Generally, the use of financial engineering in the organizations’ resources management is a significant determinant of the organizations’ success. Organizations need financial specialists with expertise and practical know-how as well as advanced knowledge in the financial management and strategic planning (Vidyasagar, 2014). In addition, firms need to focus on the importance of financial operations in a wider perspective in order to attain the desired goal of resource allocation (Vidyasagar, 2014). Therefore, this study will be examining the relevance of financial engineering in improving financial management and resource allocations

Financial Engineering, Resource Allocation and Management

The Relationship between Financial Engineering and Resource Allocation

Studies indicate a complex relationship between the financial engineering and resource allocation as well as management (Marek & Tomasz, 2010; Cuthbertson & Nitzsche, 2001; Salih, 2008). In most organizations, this relationship is not direct. In fact, different mechanisms are used to find the solution of the financial problems as well as the resource allocation and management (Marek & Tomasz, 2010). Besides, the new developments in the financial sector result in the new tools, which increasingly make the concept, become more complex (Marek & Tomasz, 2010). According to Salih (2008), such stochastic variables have to be taken into consideration in order to make a concrete conclusion. In other words, in order to come to a conclusion on whether the resources are suitable for a particular department, a procedural mechanism that include all the tools that measure the identified variables have to be determined (Salih, 2008). Newly emerging tools such as the risk management, asset management, and financial operation management are significant determinants of the success of the resources management (Marek & Tomasz, 2010).

Resources Allocation and Management

Firms not only allocate resources to be used for the purpose of completion of the desired projects but also to attain the returns on investments (Cuthbertson & Nitzsche, 2001). As such, resources that are used within the organization are considered as a form of investments. The approach that is normally used in the resource allocation is similar methods that financial engineers apply to determine the best investment portfolio for the firm (Cuthbertson & Nitzsche, 2001). Essentially, firms need new tools that can enhance growth and productivity. Therefore diverse mechanisms that utilize different tools for new investments are critical for the long-term success of the firm (Cuthbertson & Nitzsche, 2001). Besides, many factors may influence these variables. For instance, in firms within the financial sector, the resource allocation variables may be influenced by the development in the conventional securities, techniques in the financial restructuring and new development of tools for financial management (Cuthbertson & Nitzsche, 2001). Marek and Tomasz (2010) argued that these factors remain critical consideration especially where the resources are aimed at increasing performance. Moreover, financial engineering techniques that delve deep into the effects of these stochastic variables are highly needed in order to increase the returns on investments, improve on the efficiency in the use of resources and be cost-effective (Salih, 2008). Therefore, financial engineering techniques are significant within the organization since it meets the needs of the firm at different levels of funding (Marek & Tomasz, 2010).

Financial engineering has been majorly applied in the financial markets. The financial tools and mechanisms have been applied in the institutions within the capital markets to overcome the inadequacies of capital within the most appropriate conditions as well as aid in allocating funds for the novel and high risk projects with increased potential for growth (Vidyasagar, 2014). Essentially, the financial mechanisms have been utilized to determine the needs of investment funding among the financial institutions. Vidyasagar (2014) discussed different mechanisms applied through the design, development and execution of innovative financial instruments used in the resources planning and allocation. In fact, Marek and Tomasz (2010) formulated creative procedures and processes that can be applied to find solutions to the financial problems encountered during resources allocation and management.

Financial Engineering, Resource Management and Planning

Resource Management and Decision-Making

Marek and Tomasz (2010) argued that in the last decade, financial decisions have been broadened to include other aspects such as resource allocation planning. The inclusion of various aspects of the organizational processes has not only complicated the financial decisions but also increased the technicality in financial management (Marek & Tomasz, 2010). As such, the complexities of the financial management and decision-making processes have improved briskly. The rapid development in the complexities involved in the financial decision-making processes emphasizes on the need to develop and execute highly effective quantitative techniques that directly support financial management processes particularly, in relation to the resource allocation (Marek & Tomasz, 2010). Marek and Tomasz (2010) worked out some of the possible methodologies that are suitable for offering solutions to the complex problems involved in financial decisions concerned with resources allocation and planning.

In connection to the Marek and Tomasz (2010) assertions, Cuthbertson and Nitzsche (2001) argued that there is a linkage between the resources planning and financial decisions, which normally involve complex procedures requiring the complicated quantitative analysis techniques. As such, there is a critical need to provide solutions to the complex issues through the application of integrated and realistic approaches (Cuthbertson & Nitzsche, 2001). In this case, the understanding of the connection between the financial theory and mathematical modeling remains critical (Cuthbertson & Nitzsche, 2001). The resources planning processes require varied techniques and tools from diverse areas including the field of optimization, stochastic processes and simulation (Cuthbertson & Nitzsche, 2001). Most importantly, the forecasting techniques, decision support systems and indistinct logic are also critical tools in this process (Cuthbertson & Nitzsche, 2001).

Essentially, in the resources planning, a wide range of financial theory and operations research and mathematics are highly applied (Cuthbertson & Nitzsche, 2001). The operation research is widely applied in financial decision-making and planning problems including resources selection and management, returns on investments predictions and resource planning (Cuthbertson & Nitzsche, 2001). However, these contributions of the financial engineering techniques are not limited to the theoretical perspective but are continuously being applied practically by firms in almost all sectors within the economy (Cuthbertson & Nitzsche, 2001).

The new frameworks describe the complex nature of the current financial decision-making processes (Neftci, 2004). The multidimensional nature of financial decision-making has been a subject of study for many researchers who have managed to provide solutions to the issues in a wider and more realistic perspectives considering all the pertinent factors involved (Neftci, 2004). Such are the thoughts and findings that culminate into the foundations of financial decision-making in resources allocation and planning (Neftci, 2004). In other words, most researchers have explored the potential of applying financial decision-making tools to address the resource allocation and planning problems.

Resource Planning

Generally, in the resource planning, the traditional financial decision-making tools such as the optimization, econometric analysis tools and statistical approaches are applied (Bruno, 2013). In fact, these tools are used within the financial engineering based on the assumption that the issue under consideration is well formulated concerning the reality involved (Bruno, 2013). In most cases, a single objective is considered in these decisions (Bruno, 2013). In other words, the evaluation procedures follow a single criterion that produces a greater outcome. In such a case, the problem of the issue can easily be obtained.

Essentially, the resource planning is a complex procedure and the techniques used in the financial engineering are in the best position to find solutions to most of the issues involved (Bruno, 2013). In most cases, the resources planning and allocation procedures involve multiple measures as well as the conflicting situations between the standards (Bruno, 2013). Besides, the resource planning and management involve complicated, subjective and ill-structured nature of the evaluation processes (Bruno, 2013). As such, there is need to include the financial decision makers in the process particularly, in the evaluation stage in order to determine the effectiveness in the use of resources (Bruno, 2013). In other words, in order to attain the highly successful resources planning and management processes, it is critical to take into consideration the financial decision makers’ preferences, experiences and knowledge in the projects formulation and evaluation.

Linking the Financial Engineering and Research

While most studies have been primarily concentrated on the complex processes involved in financial engineering and decision-making procedures within the organization, few researchers have concentrated on the effects of financial engineering in resource allocation and planning (Vidyasagar, 2014). Essentially, the majority of researchers have been concerned with financial decisions involving venture capital, mortgage financing, capital structures and procedures, capital and asset management as well as the financial derivatives, which involve complex financial decision procedures requiring complicated mathematical, econometric and statistical techniques as well as tools (Vidyasagar, 2014). However, the literature is deficient in how the complicated mathematical, econometric and statistical techniques can be applied in the resource planning and management (Vidyasagar, 2014). Therefore, this study remains critical in filling this knowledge gap within the general financial literature. In addition, the study findings will be used not only by the scholars in the financial field but also by the organization managers, financial analysts as well as other practitioners.

Conclusion

The studies indicate a close link between financial engineering and resource allocation. Therefore, there is a significant relevance of financial engineering in the resource allocation and management. However, as noted by some researchers, the relationships between the variables are not direct and involve complex mechanisms. The literature indicates that appropriate decisions involving financial resources management can be achieved through the applications of tools that are within the scope of financial engineering. In other words, financial engineering techniques are significant within the organization since it meets the needs of the firm at different levels of funding. Essentially, financial engineering remains a critical technique used in the financial resource allocation management and decisions. Therefore, organizations need to incorporate the financial engineering in their resources management in order to attain the equitable resources allocation and meaningful use of the resources.

References

Bruno, R. (2013). Statistical Methods for Financial Engineering. Montreal, Ca: Chapman and Hall/CRC.

Cuthbertson, K., & Nitzsche, D. (2001). Financial engineering: Derivatives and risk management. New York: John Wiley.

Marek, C. & Tomasz, Z. (2010). Mathematics for finance: An introduction to financial engineering. London: Springer.

Neftci, S. (2004). Principles of financial engineering. San Diego, Calif.: Elsevier Academic Press.

Salih, N. N. (2008). Principles of financial engineering. Burlington, USA: Elsevier Inc.

Vidyasagar, M. (2014). A tutorial introduction to financial engineering. Current trends in science. Web.

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