The Elements of Financial Engineering

–          Embodies the notion that there are a few elemental building blocks or financial contracts that can be combined in a rigorous fashion  to produce an almost unlimited variety of non-standard cash flow expectations.

–          Conceptually, the idea is that all familiar financial securities ca be thought of as having some combination of;

1. Credit extension (such as loans, bonds, etc.)
2. Price fixing (such as futures / forward contracts)
3. Price Insurance (such as call / put options)

–          The invention of new or hybrid financial securities to fit exactly some requirement of an individual financial market participant is a matter of combining these elements into a package of claims that will produce a profile of cash flow expectations meeting this need.