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Abdur Rashid Mirza

University of Lahore

School of Accountancy and FinanceFinancial Engineering (Product and Services

of Islamic Financial Institution)

Lecture no.1

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Definition of Finance

A branch of economics concerned with resourceallocation as well as resourcemanagement, acquisition and investment.

Simply, finance deals with matters  related to money and

the markets.Definition of Engineering 

Engineering is basically the planning stage of

manufacturing something.

Definition of Finance + Engineering 

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 Financial engineering  can be defined as

‘the  design , development , and theimplementation of innovative

financial instruments and processes,

and the formulation of creativesolutions to problems in finance’.

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Definition of Financial

Engineering 

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 What is Financial

Engineering?This is done in order to maximize profits

using different combinations ofequity , futures, options, fixed income(Bonds), swaps (exchange).

They apply theoretical finance andcomputer modeling skills to makepricing, trading and portfolio management

decisions.

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Constructing (mathematical and

graphical) representation of economicand engineering manufacturing withthe help of computer system.

Computer Modeling 

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Financial Engineers are

prepared for careers in:Investment Banking

Corporate Strategic

Planning 

Risk Management

Primary and DerivativesSecurities Valuation

Financial InformationSystems Management

Portfolio Management

Security Trading 

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Financial markets are becoming more and more sophisticated, and

competitive. In order toachievement the fast changing market environment and face

increasing competition , financialengineering and innovation isimperative.

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Need for Financial Engineering in

Islamic Finance

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Financial needs of both individuals

and businesses have changed.Engineers in modern finance have

designed several new ways such

as mortgages , options ,derivatives etc., to meet thoseneeds.

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Scope for Financial Engineering 

in Islamic Finance

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Derivative instruments Contracts

such as options and futures whoseprice is derived from the priceof the original financial asset.

Derivative

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The scope for financial

engineering, and for that matterfor innovations in other fields ,is quite wide. It is important

that the task is given over tothose experts who know theneeds and facts of the trade. 

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Scope for Financial Engineering 

in Islamic Finance

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The Golden Principle of Free Choice

and the discussion of the few

prohibitions, we can summarize theguidelines for financial engineering in what

we call “Four Cs of Islamic FinancialEngineering”. These are:

Consciousness

Clarity

Capability

Commitment   12

The Four Cs of Islamic Financial

Engineering 

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That the parties should consciously and

willingly agree on the conditions ofcontract without pressure. Animplication of this is that any agreementmade in the state of unconsciousness isnot valid.

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Consciousness

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That the parties are fully aware of all the

implications of the conditions laid down ina contract. Any ambiguity will make the agreement

invalid. An implication is to minimize uneveninformation.

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Clarity

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That the parties are reasonably certain that they are

capable of complying with all conditions of

the contract. An implication of this is that sale of any

goods (or services) which are not owned andpossessed by the seller at the time of the

contract is not valid.

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Capability

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That the parties intend and are

committed to respect the terms of acontract both in letter and spirit.

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Commitment