Capital Structure Decisions: Evaluating Risk and Uncertainty

Chapter Seven

Innovations in Capital Structure

ADVANCES IN THE FIELDS of finance, banking, and financial markets have given rise to several new instruments that support the capital requirements of a firm. “Necessity is the mother of invention” is the old adage that holds good even for financial markets. Suppliers of funds and borrowers of funds have different aspirations and expectations from the issue and the use of financial instruments. Regulators and government bodies also play a crucial role in directing and guiding innovations in financial markets. The overwhelming growth of instruments during the last three decades is a result of a number of factors. Design, development, and implementation of new and creative instruments are a result of matching the borrower’s needs with the supplier’s resources. The design and development of innovative financial instruments, processes, and systems is a completely new field, defined as financial engineering, that involves the participation of financial analysts and engineers to develop and market new and innovative instruments. Most financial engineering books merely concentrate on and explain the development and valuation of derivative instruments. The field is much larger than the development of derivative instruments; it includes all such innovations in financial markets that reflect a quantum leap in financial obligations and rewards and that create new risk-and-return profiles for suppliers and borrowers. The use and development of ...