Financial engineering is a field of study which studies the science of financial resources. It combines economics and banking and applies it to the study of financial systems, their processes and institutions, and the impact of their performance on the economy. It also studies international financing and the political economy of financing.
The term itself seems quite broad, but can be broken down into several smaller subtopics. Among these subtopics are banks, financial service providers, financial institutions, monetary policy, credit policy, banking derivatives, monetary central banks, banking standards, accounting, financial markets, government finance, nonbank financial instruments, and other aspects of the financial sector. Within these topics, there are numerous subtopics that focus on particular areas or fields. Some of these are discussed below.
Accounting is an area of study that deals with the measurement and evaluation of financial transactions. Its main objective is the measurement and statement of assets, liabilities, and equity. It includes valuing assets and liabilities and measuring the market value of publicly traded securities and intangibles, which include stock indexes, bond indexes, commodity indices, and money market funds. Its process helps in the determination of the financial statement’s relevant allowance for fair value and also determines the method of measurement used in preparing the financial statements.
Another area of accounting is measurement of cash flow. Cash flow is the flow of payments from the source and an amount of cash saved or available to finance an asset from acquisition to disposition. It is calculated by calculating the difference between the total number of payments taken in a period and the total cash at the end of that period. This difference is then divided by the amount of net assets owned or equity. An accountant may also divide the assets, liabilities, equity, and net worth by the number of years during which the business operated.
Private banking also deals with various other financial matters. It aims at providing financial instruments for corporate, individual, and United Kingdom markets. The various financial instruments are derivatives, forward contracts, swaps, interest rate contracts, forward puts, options, foreign exchange, and credit default swaps. Derivatives are derivatives that allow the transfer of one variable (e.g., interest rate) to another, including both physical and virtual amounts.
There are different types of derivatives including forward, spot, equity index, interest rate swap, counterparty, credit default swap, equity swap, interest rate swaptions, global credit default swap, internal rate of return swap, mortgage-related securities, monetary swap agreements, reverse repo financing agreements, risk retention funds, and other financial instruments. Financial institutions can utilize their own proprietary accounting systems. Alternately, they can use the guidelines provided by the US GAAP (Generally Accepted Accounting Principles). The UK FSA has issued guidelines regarding the use of financial statements and accounting principles in the United Kingdom. The US GAAP (Generally Accepted Accounting Principles) is the international standard for accounting practices used by US companies.