Financial Engineering - Explained

You may not have heard this term Financial Engineering as many tomes post the 2008 recession as you might have heard it before the recession. As someone who has been editor- finance at CE I thought that I must write something about this field for those CEans who dont know much about it. So what exactly is Financial Engineering? What do you engineer/design in this? Can stuff in finance be engineered?

#-Link-Snipped-#Well, financial engineering is not engineering per se; because you don't create something anew. In finance there are a lot of financial products. Insurance, for example, is a financial product wherein you pay some amount (called as premium) and your life is insured (i.e. should you die your loved ones would get some money). Loan again is a financial product wherein you get a some of money which you have return at a later date obviously adding some interest on it. Now these are simple financial products. There are a lot of sophisticated financial products such as exotic options. To put in simplistic terms exotic option can earn the owner of the options some (in fact a lot of) profit if prices of some securities move as per his expectation or if some series of events happens as per the predictions/expectations of the owner of the options.

Now development of these derivative products like exotic options and interest rate derivatives etc. involves a lot of mathematical modeling, probabilistic computations and application of complex mathematical models to financial phenomena. Financial engineering essentially is a field that involves creation of financial products through application of applied mathematics and engineering methodologies. As these financial products are quite complex and involve a lot of money, this field is a sought after field by a lot of engineers.

If pure mathematics, probability, quantitative methods etc interest you and you want to design complex products for big financial institutions then this surely is your field. But if you like pure finance and economics (sans all the mathematics and quantitative analysis) then this may not be the field for you.

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