(Source:  www.corporatefinanceinstitute.com)

What is Financial Engineering: What You Need to Know
By Bayu Pamungkas

What is Financial Engineering?

A financial engineer, or computational engineer, provides clients with guidance on risk management and investment strategies rooted in a quantitative assessment of their portfolio and the current market context. In the role of a financial engineer, you will analyze the stock market to predict stock performance, create models of stock market trends using historical data, and offer recommendations for portfolio management (esilv, 2022).

Financial engineering is a cross-disciplinary area within the investment sector that utilizes applied mathematics, statistics, computer science, financial theory, and economics to perform quantitative evaluations of financial markets. This field is centered on creating models and methods to formulate and assess investment strategies, imagine and design new financial products, manage risks, and generate scenarios and projections for both short-term and long-term market perspectives (CA Ruby Bansal, 2023).

What Does a Financial Engineer Do?

Financial engineers, often referred to as quantitative analysts or quants, are specialists in the finance sector who create, evaluate, and enhance models, tools, and methodologies that are common in quantitative finance. Their role involves designing innovative investment products, models, and strategies tailored for both individual investors and institutions. A significant portion of their activities focuses on investment analysis, which includes trading, hedging, risk management, and portfolio management. Alongside overseeing various quant models and techniques, financial engineers might focus on areas such as derivatives and option pricing, structured products, algorithmic trading, high-frequency trading, or machine learning as part of their quantitative toolkit.

In recent years, the use of quantitative models has increased significantly, providing numerous opportunities for financial engineers in various companies and regions globally. Financial engineers find employment at investment banks, hedge funds, asset management firms, commercial banks, insurance companies, and consultative firms in the financial sector. They are also engaged in corporate treasury departments, regulatory bodies, and international quasi-governmental organizations such as The World Bank (CA Ruby Bansal, 2023).

Financial Engineering Applications

Financial engineering is utilized to tackle various challenges and seize opportunities within the financial sector. It finds application in numerous domains such as securities analysis, pricing of derivatives and options, structured products, trading and arbitrage (including algorithmic trading), portfolio management, and risk management (which encompasses credit risk management). Financial engineers examine patterns and trends within financial markets and aim to comprehend the behaviors of market participants, which may yield insights into investment or hedging strategies. Alternatively, a financial engineer may investigate specific areas of machine learning, such as natural language processing or the evaluation of alternative data sets, to generate ideas for further research and experimentation (CA Ruby Bansal, 2023).

References:

  • Esilv. (2022). Sustainable Manufacturing: Fixing The Factory Floor. Retrieved from https://www.esilv.fr/en/so-you-want-to-be-a-financial-engineer/
  • Ca Club India. (2023). All You Need To Know About Financial Engineering. Retrieved from https://www.caclubindia.com/articles/financial-engineering-49591.asp