Financial Engineering and Stakeholder Management

Abstract

Financial engineering is basically innovation in the financial industries - the development of new financial instruments and processes that will help wealth maximization of the Share holders, issuers or intermediaries. Financial innovations occur because market participants are constantly searching for new ways to make greater profits. This will be possible only by involving all the stakeholders and hence stakeholder management is essential. Financial Innovation includes changes in financial instrument, institutions, practices and markets. It affects the nature and composition of monetary aggregates through new financial instruments or changes in old instruments as well as the term and conditions of debt/credit arrangements.The four factors of financial innovation are Volatile Financial environment due to inflation etc, Technology, Changes in the Regulatory Environment and Changes in Perceived Market Conditions. Financial innovations have the following six functions of (1)To complete the incomplete markets(2)To address agency concerns and info. Asymmetries(3)To minimize transaction cost(4)Response to taxes or regulations(5)Response to globalization and risk and (6) Stimulated by technological shocks. The five conditions for innovations in general and financial innovation in particular are The market power of enterprises, The size of enterprises, Technological opportunity, Appropriability and Product market demand conditions. But all these depend on the stakeholders as we can see that in determining each of the above factors, stake holder’s role cannot be wished away with.