Introduction

Question 1

Financial Engineering is about _____ decisions and ____ decisions.

Answer 1

Financial Engineering is about Investment decisions and Financing decisions.

Question 2

Major Factors behind growing interest in financial engineering include:
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• 
• 
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Answer 2

• Threat of financial crisis and need for managing risk
• Globalisation of markets and threat of increasing business risk
• Technological advances in communications and data transmission
• Loopholes in tax laws to be exploited by business

Question 3

Toolkits of the Financial Engineer include
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•
•

Answer 3

• Financial Instruments (Bonds, equities, financial derivatives)
• Financial Processes (public offerings, acquisitions, mergers)
• Conceptual Tools (accountant relationships, tax law, portfolio theory)

Question 4

The financial engineer is one with _____ and versatile ____.

He is a ____ not a _____. He can be an idea generator or _____; and is known to be a ____ exploiter.

Answer 4

The financial engineer is one with multi-disciplinary and versatile skills.
He is a deal maker not a hustler. He can be an idea generator or innovator; and is known to be a loophole exploiter.

Question 5

The financial engineer is involved in four areas:

Answer 5

• Corporate finance
• Securities and derivatives trading
• Investment portfolio management
• Risk management

Question 6

There are two criteria for investment decissions

Answer 6

• Direct investment in capital projects

* Portfolio investment

Question 7

Multiplicity of tax jurisdictions across countries creates ______ for tax _____ and tax _____ by multinational companies (MCN)

Answer 7

Multiplicity of tax jurisdictions across countries creates opportunities for tax avoidance and tax evasion by multinational companies (MCN)

Question 8

Mechanisms for Tax Avoidance include:
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• 
• 
• 
•

Answer 8

• “Double Irish with Dutch Sandwich”
• Tax havens
• Transfer Pricing through trade subsidiaries operating in different regions of tax jurisdiction
• Borrowing subsidiaries of same company operating in different tax areas
• Cross-crediting and sourcing rules for foreign tax credits

Question 9

What makes a financial bubble?

Answer 9

Disruption -> Boom -> Euphoria -> Financial Distress -> Revulsion

Question 10

Corporate governance provides basis for _____ financial engineering practice - it is used as a means for _____ management.

Answer 10

Corporate governance provides basis for ethical financial engineering practice - it is used as a means for risk management

Question 11

______ in systems of corporate governance breeding ground for ______ financial engineers, corporate ______ and corporate ______.

Answer 11

Irregularities in systems of corporate governance breeding ground for rogue financial engineers, corporate scandals and corporate liquidation.

Question 12

What is Corporate Governance?

Answer 12

The system of rules, practices and processes by which companies are organised, managed, directed and regulated. It is an institutional mechanism of checks and balances.

Question 13

What does Corporate Governance involve?

Answer 13

Balancing the interests of the many stakeholders in a company - i.e. its
•  shareholders
• management
• customers
• suppliers
• financiers
• governement
• community

Question 14

What are examples of Corporate Responsibility?

Answer 14

• Sound corporate governance practices
• Ethical behaviour in operations across tax jurisdictions
• Resolving problems of possible misalignment of objectives and interests.

Question 15

Give some examples of potential issues in Corporate Governance

Answer 15

• Accountability to shareholders / stakeholders
• Corporate social / environmental / global responsibility
• Transparency and accountability for management decisions
• Ethical business practices
• Capital structure and Corporate Control
• Independence of the financial engineer
• Independence of system of auditing of financial reports

Question 16

Corporate Governance became a pressing issue following the 2002 _____ Act in the US which was to restore public confidence in companies and markets following _____ .

Answer 16

Corporate Governance became a pressing issue following the 2002 Sarbanes-Oxley Act in the US which was to restore public confidence in companies and markets following high profile bankruptcies.

Question 17

Irregularities in Corporate Governance and Corporate Scandals is also known as ______.

Answer 17

Creative Accounting

Question 18

Give examples of Creative Accounting practices

Answer 18

• Claim on profits of acquired firms as “organic growth”
• Booking capital gains from sale of assets as profit
• Use of SPEs as off-balance hiding debts
• “talking up” share values
• Vendor financing schemes

Question 19

Measures to redress failures in corporate governance include;
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•

Answer 19

• The UK Higgs report to review existing corporate governance practices
• The US legislation (Sarbanes-Oxley Act 2002) to impose penalties on wrong-doing and impose rigorous requirements on transparency.

Question 20

Factors which affect corporate governance

Answer 20

• Societal pressure
• Regulatory pressure
• Pressure from stakeholders
• Board structure