GLOBAL FINANCIAL markets continue to develop at a breakneck pace and financial institutions are striving to produce increasingly innovative financial vehicles to satisfy investors' needs. Structured products are an example of these new solutions. They combine or subdivide existing instruments to create new financial products. Structured products, which emerged in Europe in the late 1980s, are generally created to meet specific needs that traditional financial instruments cannot meet. The investment tool can be used as an alternative to a direct investment, as part of the asset allocation process to reduce risk exposure of a portfolio, or to utilise a market trend. The demand for diverse investment tools has created opportunities for 'financial engineers', who use mathematical finance, numerical methods and computer simulations to make trading, hedging and investment decisions, and develop risk management initiatives to protect investment decisions. 'Financial engineering is where technology and quantitative analysis meet to solve risk problems and find investment opportunities,' said Arnaud Sarfati, Societe Generale managing director, financial engineering head of equity linked products. 'It evolved out of options pricing, and is primarily focused on derivatives because they are among the most difficult instruments to price and are also some of the most complex investment tools.' By using the application of sophisticated mathematical tools to assess and manage complex financial investment products, financial engineering has become indispensable to a wide range of business activities, including investment banking, commercial banking, corporate finance, portfolio management, risk management, and financial consulting and planning. 'The combination of financial engineering methods and traditional portfolio analysis leads to totally new insights and possibilities in asset structuring,' Mr Sarfati said. He said as wealth grew and the more affluent people in Asia realised the benefits they could reap from structured products, demand would also rise for financial engineers who could meet their needs. 'Hong Kong is a major international financial centre and well placed to meet the increasing demand for alternative financial solutions in the region as well as to develop into a major market for structured products,' Mr Sarfati said. Financial engineers working in the company's Hong Kong operation ensure the pricing of structures, the safety of transition processes, and the study and development of structures. They work closely with traders, sales and other support functions. Financial engineers also price equity, index-linked and alternative investment-linked structures. In addition, they help to analyise customers' needs and customise existing products. Mr Sarfati said the company's financial engineers used sophisticated tools, but context and judgment were extremely important. The main factors for success included the level of mathematical background and talent, experience in computing and an interest in the finance industry. 'Essentially, a financial engineer helps to repackage financial products to produce new products with desirable characteristics. Much of the work involves risk management and requires qualitative as well as quantitative skills. For instance, an understanding of how organisations and markets work and an awareness of the things that can go wrong,' he said. He said the company remained competitive by investing heavily in technology infrastructure and recruiting the brightest and best people. According to industry analysts, throughout its worldwide operation, Societe Generale spends about Euro200 million (HK$2.05 billion) a year on updating IT systems. 'As a company that insists on the best we have high barriers of entry, but these standards mean we retain the best talent even though competitors occasionally try to entice away some of the company's best people,' Mr Sarfati said. The firm is not content with adopting current trends but wants to use its innovative concepts to define new standards. It employs teams of financial engineers to work on product innovation. Globally, over the past three years the division has hired on average 120 staff a year to strengthen the department. Developments in the financial sector during the past decade have shown the need for educational programmes to equip graduates with the necessary tools and techniques to evaluate financial markets, determine investment strategies, and design, engineer and market new financial products. The Master of Science in financial engineering offered by the City University of Hong Kong aims to provide education to students who want to work in the growing finance industry. The topic has become more appealing with the emergence of new securities and financial instruments, such as options, swaps, interest rate derivatives, credit derivatives and private retirement plans. Hong Kong University offers a mathematical finance degree in financial engineering which represents an optimal mix of fundamental and cutting-edge knowledge in all areas of modern finance.