Corporate Financial Engineering

Course Number 1426

Professor Peter Tufano
Senior Lecturer Timothy Luehrman
Winter, 20 Sessions
Paper

Career Focus

This course is designed for students who seek to understand of how financial engineering, especially derivatives and risk management techniques, can be used to advance the strategic goals of their firms. The course aims to prepare executives of corporations, who issue securities and use a wide array of derivative contracts; bankers, who design, price, produce, sell, and buy securities both on their own behalf and for their clients; and investment managers. While the perspectives of issuer, intermediary, and investor are all considered in the course, special emphasis is given to problems faced by corporate financial managers.

Educational Objectives

The goal of the course is to show how financial managers can utilize capital markets technology to create value. Specifically, we will explore how new financial technologies can be used to (1) manage financial risks and position firms to exploit strategic opportunities; (2) lower firms' financing costs (by tailoring securities for particular investors' needs, or by exploiting tax, regulatory, or other arbitrages); (3) signal information; (4) structure incentives; and (5) substitute for or complement product market decisions. These activities are often implemented through risk management programs and security issues. The course deals with the design and pricing of a wide range of instruments and the design and operation of risk management programs at firms. While the primary educational objective is to study the applications of financial engineering, an equally important objective is to give students a technical introduction to derivatives, especially options.

Course Content and Organization

Early sessions in the course provide students with an introduction to options and option pricing, using textbook readings, notes, exercises, and cases. We will build on the concepts developed in Fin2. (We will also cover, although in less detail, simple bonds, forward, future and swap contracts.) The remainder of the course draws upon the analytic tools and intuition developed to examine recent securities or risk management strategies in which firms have successfully or unsuccessfully attempted to use modern financial technology. The major modules of the course include (1) understanding financial engineering used to support marketing and production programs, signal information, structure incentives, tap different investor clienteles, minimize bankruptcy costs, and address tax and accounting concerns; and (2) using derivatives to manage corporate financial risks, specifically the control of equity, interest rate, and commodity price exposures. The applications section of the course will use a combination of cases, notes, readings, and prospectuses. The applications are drawn from a variety of different industries and the instruments studied are both domestic and global in nature. There is a greater emphasis on equity derivatives, with lesser emphasis on fixed income and commodity derivative products. Students interested in foreign exchange issues should consider International Managerial Finance or other offerings.

Students will be require to write a paper and may work in small teams. The papers should examine an application of financial engineering in a managerial setting and must be approved in advance. Students may also be asked to present their findings to their classmates.