Financial engineering is an interdisciplinary branch of the investment industry that makes use of applied mathematics, statistics, computer science, financial theory, and economics to conduct quantitative analysis on the financial markets. The field focuses on developing models and techniques to develop and test investment strategies, to envision and create new financial products, to manage risk, and to produce scenarios and forecasts for both short- and long-term perspectives on the markets. Financial engineers are employed by investment banks, hedge funds, asset managers, commercial banks, insurance agencies, and consultancies to the financial industry. They also work in corporate treasuries, regulatory agencies, and in international quasi-governmental organizations like The World Bank.
What is a Financial Engineer?
Financial engineers (also known as “quantitative analysts” or “quants”) are practitioners in the financial industry who are responsible for developing, testing, and improving on models, tools, and techniques that are prevalent in quantitative finance. They work on creating new investment products, models, and strategies for individual investors and institutions. Much of their work centres on investment analysis and encompasses trading, hedging, risk management, and portfolio management. In addition to managing a wide range of quant models and methods, financial engineers may specialize in derivatives and option pricing, structured products, algorithmic trading, high frequency trading, or machine learning as part of their quant tool kit.
As highly-educated professionals, financial engineers occupy an important niche in the investment industry. In recent decades, the interest in and employment of quantitative approaches to investment and portfolio management have grown substantially and there are many opportunities for financial engineers across a wide array of firms and locations around the world.
How to Become a Financial Engineer
The field of quantitative finance has been growing steadily since the 1970s, but financial engineering as a specific field of academic study has only existed since the 1990s. Since then, professional qualifications, like the Certificate in Quantitative Finance (CQF), as well as a number of university programs, like Masters in Financial Engineering (MFE), have been launched to provide a pipeline to the industry.
In general, embarking on a career as a financial engineer will require a strong background in calculus, probability and statistics, and computer programming at the undergraduate and often the graduate level. For those seeking to complete additional education while working full time, the CQF offers a rigorous practitioner-focused credential and includes a solid grounding on the following topics:
- Financial Markets and Securities
- Fixed Income Models
- Credit Models
- Risk Management
- Portfolio Management
- Machine Learning
- Computer Science/Programming: Python
Find out more about the CQF as a respected financial engineering credential here.
Financial Engineering in Quantitative Finance
Financial engineering is used to address a wide range of challenges and opportunities in the financial world. Applications for its methods can be found across such diverse areas as:
- Securities analysis
- Derivatives and option pricing
- Structured products
- Trading and arbitrage, including algorithmic trading
- Portfolio management
- Risk management, including credit risk management
- Behavioral finance
- Machine learning as applied to investment strategy and portfolio management
Financial engineers may explore patterns and trends in financial markets and seek to understand the behavior of market participants, potentially leading to insights on investment and/or hedging strategies or hedging. Alternatively, a financial engineer might delve deeply into areas of machine learning like natural language processing or analysis of alternative data sets to develop ideas for further research and testing. Some financial engineers are focused on market microstructure and may explore technical areas such as algorithmic or high frequency trading and their impact on financial market dynamics. Finally, financial engineers may work on developing approaches for evaluating and managing risk for specific asset classes or financial products, or for the so-called “systemic risk” that is inherent in the financial system as a whole.
As a professional enclave within the global capital markets, financial engineering continues to expand, with skilled employees in high demand. It is an exciting area of study and a great time to consider your options on the path towards a career in quantitative finance.