Financial engineering

INTRODUCTION
Generalizing: Financial Engineering involves the design, the development, and the implementation of innovative financial instruments and processes, and the formulation of creative solutions to problems in finance.

Specializing: Financial Engineering is risk management via creative structural tools.

MEANING
Trading Perspective Create structured securities from basic assets to catch specific market niches Modeling Perspective Develop/apply contingent claim valuation methods to price exotic structured securities Management Perspective Assess the uncertainty of future payoff of portfolio Determine strategies to restructure the portfolio risk-return to meet investors objectives

Generally, Financial Engineers are strong on the following fields:

Statistics/Probability and PDEs Stochastic Processes C++ Programming Basic Business Finance Theory

Financial engineering is a multidisciplinary field relating to the creation of new financial instruments and strategies, typically exotic options and specialized interest rate derivatives. The field applies engineering methodologies to problems in finance, and employs financial theory and applied mathematics, as well as computation and the practice of programming; see computational finance.

Despite its name, financial engineering does not belong to any of the fields in traditional engineering. In the United States, the Accreditation Board for Engineering and Technology (ABET) does not accredit financial engineering degrees.

Financial engineering is also the process of creating new securities or processes, and designing new financial instruments, especially derivative securities. More importantly financial engineering is the process of employing mathematical, finance and computer modeling skills to make pricing, hedging, trading and portfolio management decisions. Utilizing various derivative securities and other methods, financial engineering aims to precisely control the financial risk that an entity takes on. Methods can be employed to take on unlimited risks under certain events, or completely eliminate other risks by utilizing combinations of derivative and other securities.

Financial Engineers are prepared for careers in:

Investment Banking Corporate Strategic Planning Risk Management Primary and Derivatives Securities Valuation Financial Information Systems Management Portfolio Management Security Trading

Financial engineering is normally employed in the securities and banking industries. It is also used by quantitative analysts in consulting firms or in general manufacturing and service firms, in corporate treasury, corporate finance and risk management roles. Financial engineers will often hold doctorates in computer science or mathematics, although, increasingly, have instead completed a specialized (terminal) masters degree - usually the Master of Financial Engineering, or the more general Master of Quantitative Finance.

Financial engineering is a process that utilizes existing financial instruments to create a new and enhanced product of some type. Just about any combination of financial instruments and products can be used in financial engineering. The process may involve a simple union between two products, or make use of several different products to create a new product that provides benefits that none of the other instruments could manage on their own.

One excellent example of financial engineering is financial reinsurance. Companies that offer reinsurance options essentially provide a way for the ceding insurer to minimize a drain on available resources when a major shift in premium growth or reduction is taking place. In this scenario, the process of financial engineering helps to create a stable environment that will allow the insurer to remain solvent and stable even when extreme conditions exist.

Advantages and Disadvantages

Have knowledge of both Finance and Engineering. Learn to price financial instruments with simple methods. New career opportunities for both students who have their undergraduate degree on engineering and social sciences. Have knowledge of emerging markets.

These are some important advantages of FE. However hardness of the program for both economists, financial analysts and engineers can be seen its only disadvantage.

For the consumer, the work of a financial engineer to create new finance product offerings can be a great advantage. In some instances, the new and improved product is simply a repackage of several independent but complimentary products made available at a lower price. For example, the consumer may find that purchasing insurance coverage that provides dental, hospital, and prescription coverage may be significantly less expensive than purchasing individual plans.

Financial engineering works in other environments as well. The financial theory of offering several existing products under one package has become very common in the telecommunications industry. Many providers today offer bundled service packages that include local phone service, unlimited national long distance, Internet service, and cable or digital satellite television. The end result of this type of arrangement means one lower price to obtain three or more services at significant cost savings to the consumer.

Sometimes known as computational finance, financial engineering relies heavily on mathematically calculating the outcome if various combinations of financial instruments are offered less than one umbrella as a package deal. Usually, the calculations indicate that the providers stand to do very well with the new hybrid financial product, as the product holds the potential to attract new consumers who would have foregone use of one or more of the instruments if the only option was to purchase them individually.

CONCLUSION
Financial engineering methodology, the enterprises can largely reduce the unforeseeable risk in business activities. In addition, the creative use of financial engineering technology can effectively reduce the use of external funding, optimize the financial cost and improve the corporate decision of capital structure.