Faculty of business and economics
When is Financial Innovation not enough?
Master Project Financial Economics: Seminar Series
Topic 3:Asset Management
Master of Science in Financial Economics
November 30, 2011
During the presentation of Leyder Van Houdt at Dexia, the lecturer explained that one of the roles of thesales team to create value to their financial management clients was to offer them tailor made / structured products. The lecturer also mentioned that in order to implement this added-value model,banks should depend on a strong financial engineering team to offer all type of capital market products to clients.
This paper discusses whether this recent financial innovation may clearly createvalue or have being a detonator for the last credit crisis which was exacerbated by the market illiquidity for many structured credit products that spread in the capital market.-------------------------------------------------
* Financial Innovation as a tool for Value Creation
According to Marshall and Bansal (1992), financial engineering in conventional financing is most related toderivatives and the concept involves the creation, development and implementation of innovative instruments and services to solve financial problems such as transactions costs or improve the connectionbetween borrowers and investors. At a first glance, the natural born conceptualization of the derivatives may have the naive objective of achieving better returns as Merton (1992) suggested.
It is notsurprising to them that in recent years, primary market issuance and secondary market trading have shown an interest in developing and commercializing new innovative structured products that canreduce, transfer and adapt risk to satisfy different investor’s profiles. This new supply of transformed, extended or modified financial instruments have facilitated the investment and consumption needs...