To evaluate: Whether there is any chance of spending resources on creating real assets in an efficient way than just rearranging them and highlight some benefits earned by creating an array of derivative securities using primary securities.
Introduction:
Real assets: Assets which have a physical form can be justified as “real assets”. Money invested in purchase of real assets proves beneficial as it has inherent worth due to its properties. Few examples of real assets are building, land, machinery and plant etc.
First of all, basis of financial engineering can be referred to as a program where finance and investment related aspects are dealt with using mathematical techniques. In other words, it is a platform which is a bunch of financial theory, engineering methods, various mathematical tools and programming techniques. Normally it contains a lot of paper shuffling.
Even though all financial assets are good, it cannot be assumed that all financial assets work the same way. If financial assets like bonds, stocks or mortgages are considered, it is found that these assets have their own payment format. The risks and the returns earned also differ accordingly For instance, consider government bonds and mortgage loans, both have particular payment format but with a difference − government bonds make coupon payments semi- annually while mortgage loans have a facility of being prepaid. When it comes to borrowing, sometimes the government borrows money with risks on reinvestment and people having an intention of buying a home may borrow money with zero prepayment and risks applicable by default.
Whatever the situation may be, the financial engineering products work better on financial underlying assets. But still investment in real assets is worthy as sometimes risk factor involved is less. The concept of more risk, more profit plays significant role in making a decision.
As concluded that the investment in real assets is worthy as sometimes risk factor involved in real assets is less.