Corporate finance, bank finance and investments have changed in recent years. This change has given birth to a new discipline that has come to known as ‘Financial Engineering’. It involves the design, development and implementation of innovative financial instruments/ processes and the formulation of creative solution to financial problems. By combining elements of forward, future options and swaps, firm can create a financial instrument that meets the needs of the corporate i.e trying to hedge it’s risk exposure or one offers the institutional investors an investment opportunity with a unique payoff structure. Financial Engineering in simple words can be defined as the process of using the principles of financial economics to design and price financial instruments. To design innovative financial instruments, financial engineers requires specific skill too. The purpose of the present paper is to understand the concept of financial engineering, functions carried out by them, factors affecting financial engineering etc.