What is Financial Engineering?

There are numerous definitions of financial engineering, but most revolve around managing and reducing financial risk. A few definitions from popular books and web sites include the following:

"Financial engineering refers to the application of various mathematical, statistical and computational techniques to solve practical problems in finance. Such problems include the valuation of derivatives instruments such as options, futures and swaps, the trading of securities, risk management and regulation of financial markets. No single set of mathematical tools, computational techniques or financial theory describes financial engineering. Rather, it is the synthesis of a variety of these elements. Financial engineering is a practical field and a practitioners’ field by its nature. It is driven in large part by practical problems that arise in the course of daily business; the nature of the problems demand that practitioners draw from as broad a palate of tools as possible to find the best solutions to their problems. A second, related definition is that financial engineering is the use of financial instruments such as forwards, futures, swaps, options, and related products to restructure or rearrange cash flows in order to achieve particular financial goals, particularly the management of financial risk."

"The process of financial engineering can be ... viewed as the 'fine-tuning' of an existing financial product to improve its return or risk characteristics in light of changing market conditions. It can be considered as a process which allows existing financial products to be overhauled and restructured to take advantage of changed taxation, legal or general economic climate."

Role of Financial Engineers

The rapidity with which corporate finance, bank finance, and investment finance have changed in recent years has given birth to a new discipline that has come to be known as financial engineering. As with most disciplines in their early stages of development, the field of financial engineering has attracted people with an assortment of backgrounds and perspectives. The term financial engineering means different things to different people like commercial bankers, investment bankers, corporate treasurers, corporate recruiters, financial engineers, financial analysts, and others. This is not surprising. The field is not yet very well defined and each practitioner tends to view his or her own body of experience as the crux of that which constitutes the discipline.

Abhishek Sharma

ibsar, mumbai