Financial Engineering and Innovation as Risk Management Tools: The Case of Indian Companies During Global Financial Crisis

Abstract

In layman’s terms, financial engineering is an engineering discipline which deals with the creation of new and improved financial products through innovative design or repackaging of existing financial instruments. Financially, engineered products like American Depository Receipt (ADR) and Global Depository Receipt (GDR) have provided Indian companies access to international financial markets to raise funds. However, financial engineering is considered as being responsible for triggering the global financial crisis by increasing leverage and price risks. The regulatory framework is not the only solution to deal with the negative side of financial engineering, the informed market that responds sensibly to financial innovations (which is the current need) is also responsible. This paper looks into how fund raising by innovative financial instruments impacts the share price of the company using the cases of the Indian corporate houses.