Financial Engineering, also known as Mathematical Finance or Quantitative Finance is a new field of finance where mathematical techniques, as well as modelings, are used to solve different financial problems. This field is actually a combination of statistics, computer science, applied mathematics, and economics. In recent years, research in this area has widely been increasing and financial firms, as well as institutions, are being more dependent on financial engineers.
The development of financial engineering or quantitative finance is quite recent. In 1900, Louis Bachelier, a doctoral student in mathematics at the Sorbonne, was studying the behavior of stock prices and he found that this behavior is similar to the Brownian Motion of pollen grains. He developed the first mathematical specification of the increment reported by Brown and used it as a model for the increment of stock prices. In the 1920s Norbert Wiener, a mathematical physicist at MIT, developed the fully rigorous probabilistic framework for this model. This kind of increment is now called Brownian motion or Stochastic process which is widely used to model randomness in economics and in the physical sciences. It is central in modeling financial options.
Financial engineering is used by regular commercial banks, investment banks, insurance agencies, asset management funds, and hedge funds. Financial industries are always coming up with new and innovative investment tools and products for investors and companies. Financial engineers are able to test and issue new tools such as new methods of investment analysis, new debt offerings, new investments, new trading strategies, new financial models, etc. They run quantitative risk models to predict how an investment tool will perform and whether a new offering in the financial sector would be viable and profitable in the long run, and what types of risks are presented in each product offering given the volatility of the markets. In short, they work with areas like risk management, portfolio management, option trading, proprietary trading, swaps, and structured products.
If you are someone who wants to pursue a career in this sector, it is very advisable that you should have a solid background in quantitative-based fields. Bachelor’s degree is not offered in financial engineering, rather lots of master’s and PhD degrees are available worldwide, although, in Bangladesh, no university offers any formal degree in this field. Here is a list of universities where you can pursue a masters or PhD in Financial engineering:
- University of California, Berkeley
- NYU Tandon School of Engineering
- Columbia University
- John Hopkins University
- Cornell University
- National University of Singapore
- Korean Advanced Institute of Science and Technology (KAIST)
The course curriculum of financial engineering includes Stochastic Calculus, Derivatives, Programming languages like C, Python, MATLAB and R, Numerical Methods, Econometrics, Risk Management, Fintech, etc.
If you are someone good at programming as well as mathematics and want to explore the world of finance, then you are most welcome in the field of financial engineering.
A G M Alamgir Tipu,
Intern, Content Writing Department, YSSE.
