The purpose of this seminar is to provide the participants with a state-of-art toolkit for "Financial Engineering" and a good understanding of how these tools can be used to construct - or to decompose - financial structures with the desired risk/return characteristics. We start with a general introduction to "Financial Engineering" and discuss the purposes of using financial engineering in modern finance. We then take a closer look at the "Building Blocks" of financial engineering. We explain the "Generic Risks" (market risk, credit risk etc.) into which all financial products can be decomposed, and we show how these generic risks can be put together into products with almost any desired risk/return profile, using the "Chinese Menu Approach". We review how swap curves can be constructed from available market data and how these curves are used for pricing and risk analysis. We also briefly present the latest state-of-the-art techniques for volatility estimation. Next, we present the tools of financial engineering and explain how these can be used to construct the desired structured products. These tools include cash instruments, swaps, forwards and options. We explain how these instruments can be analyzed and how the risk/return characteristics can be summarized, providing the "Financial Engineer" with the necessary tools to construct instruments in a very powerful and flexible way. The techniques are illustrated by a number of worked examples, where we apply the toolkit to selected financial problems, resulting in some basic structured products. Finally, we present a structured approach to decomposing existing structures into basic building blocks that are easier to analyze for risk management purposes.
