Re: Question: Financial Engineers
I create a $100 bet with you saying Obama’s approval ratings would drop next year. Chicken Biryani thinks Obama’s ratings are not gonna drop, so CB buys that bet from you. A bank offers instant cash to CB to buy that bet. That bank bundles several such bets together and sells them to another investment company. That investment company creates an index based on all such bets and asks investors to bet on that index going up and down, the value of index depending on probability of Obama’s approval ratings going down. Investors buy such bets (index based fund) and trade those on a market based on their individual expectations about Obama’s ratings. An insurance company might create an insurance product to protect investors from downward or upward movement of the index fund depending on whether investors have sort or long positions. That insurance product can also be traded on market.
This is an example of what financial engineers are doing. There is nothing inherently of ‘value’ in the products that are being bought or sold. Essentially, they are all bets.