Engineering is already a complex field, so throwing finances into the mix does not mitigate the difficulties. Still, with the prominence of finances in our everyday lives, it only makes sense to combine the fields together. This is especially prevalent with the increasing popularity of cryptocurrency. It is a new method of payment and trade that strays considerably from the path of traditional currency. Not the least of which is it’s in a digital format.
In a concise explanation, financial engineering sets out to better understand finances and solve issues in the field. It aims to do this by incorporating technical methods from mathematics and, of course, engineering.
But who exactly are these people who apply statistics and programming to dominate the markets? For that matter, what are the most common jobs and how does it apply to blockchain?
What is it?
‘Financial engineering’ is a multidisciplinary field that involves the topic of financial theory. It frequently utilizes mathematical techniques as a means to solve financial problems. Financial engineering employs the use of tools and knowledge from an array of fields, including:
- Computer science
- Applied mathematics
By using these subjects, it can successfully address current financial issues. What’s more, it has the ability to formulate new and innovative financial products.
Contrary to what its name might imply, financial engineering does not associate with any fields in traditional professional engineering. This is despite many financial engineers having past experience in engineering. Moreover, many universities offering a postgraduate degree in this field require applicants to have a background in engineering as well.
It is not uncommon to refer to financial engineering as ‘quantitative analysis’. Those who typically use it are regular commercial banks, investment banks, insurance agencies, and hedge funds. There are a lot of financial engineers who come from quantitative fields. Such fields include conventional engineering, statistics, computer science, math, and economics, among others. These fields are prosperous when it comes to building models. Moreover, they have strong backgrounds in math, statistics, and occasionally programming.
How it is used
In the financial industry, there are always brand new innovations coming out. We regularly see the creation and launch of various innovative investment tools and products for investors and companies alike. The development of a majority of the products is through techniques within the field of financial engineering.
Incorporating mathematical modeling and computer engineering greatly benefits financial engineers in their practice. They have the ability to test and distribute a wide variety of new tools. These include new methods of investment analysis, debt offerings, investments, and trading strategies. Furthermore, they result in new financial models.
Financial engineers are responsible for operating quantitative risk models. With them, they can predict the overall performance of an investment tool. Additionally, whether a new offering in the financial sector will end up being feasible and lucrative in the long run. They will also be able to forecast what risk types are present in each product offering. They can draw their conclusions from the recurring volatility of the markets.
Financial engineers collaborate with an array of companies. Insurance groups, asset management firms, banks, and hedge funds are among them. Within these companies, financial engineers work in the following:
- Proprietary trading
- Risk management
- Portfolio management
- Derivatives and options pricing
- Structured products
- Corporate finance departments
Taking the intricacy of financial engineering into account, the engineers themselves have a lot on their plate. Like traditional engineers, they need a specific set of skills to thrive in their field. Above all else, financial engineers are specialists that integrate mathematical formulas, programming, and engineering methods in financial theories. Moreover, they analyze market trends in order to construct data-backed financial models.
Companies typically employ people that have advanced degrees in financial engineering. The common jobs of these specialists are investment managers and bankers. Sometimes they work as traders using their financial engineering background to work on improvements for existing investment products.
A financial engineer’s primary responsibility is to possess a thorough knowledge of financial markets. This means that they need to understand its volatility and they also have to be knowledgeable about financial theories. This insight is useful for engineers to further develop simulations as well as predict market behaviour. Obviously, these predictions do not always end up being correct. Any sudden issue may occur in the financial market, however, the risk potential dwindles.
The average financial engineer understands market trends and has knowledge about previous market performances. Therefore, this insight is helpful in making future investment predictions.
Beyond financial knowledge, it is imperative that the engineer possesses ample computer programming skills. Programming skills are mandatory for building simulating financial models to learn about the behavior of the market. With these simulations, there is an expectation for financial engineers to generate results with as much accuracy as possible.
Risk management & Market behavior
A large chunk of financial engineers works in the field of financial risk management and financial analysts. Having knowledge in computer simulations and market trends, the engineer is able to help develop profitable investment plans. These plans are for both individuals and companies. Oftentimes, each of these investment plans has a high-risk factor. While this may sound counterproductive to hiring financial engineers, it is actually a good strategy. Risk management firms frequently use it to produce higher returns than comparatively stable investments.
Companies and high net-worth individuals regularly receive assistance from financial engineers to design a portfolio. This portfolio is what places the complete investment capital at risk.
When working as a financial analyst, the financial engineer constructs real-time financial simulations. They are what allow them to predict future behavior pertaining to the market.
Within the past decade or so, governments and financial institutions would start to actively hire financial engineers. They employ them for the purpose of advising or conferring governments – whether they’re local, state or central – with market economies.
You can classify financial engineering as two specific types: ‘Derivatives Trading’ and ‘Speculation’.
- Derivatives Trading – Financial engineering regularly utilizes stochastics, simulations, and analytics for designing and implementing new financial processes to resolve financial issues. Be that as it may, the field also creates new strategies that companies can take advantage of to expand corporate profits. For instance, financial engineering would go on to result in a considerable boost of derivative trading within the financial markets. The formation of the Chicago Board Options Exchange (CBOE) was in 1973. Two of the first financial engineers, Fischer Black and Myron Scholes, would later publish their option pricing model. Thanks to them, trading in options and other derivatives would grow substantially over time.
- Speculation – The field of financial engineering would later introduce speculative vehicles in the markets. The initial creation of instruments like the Credit Default Swap (CDS), for example, was in the late 1990s. Their purpose was to provide insurance in the face of defaults on bond payments, including municipal bonds. These derivative products would nevertheless garner the attention of investment banks and speculators. They made the realization that they could make money from the monthly premium payments in association with CDS. How can they do this? By betting with them. In effect, the CDS seller or issuer – typically a bank – would obtain monthly premium payments from those purchasing the swap.
Financial engineering has clearly had some revolutionary effects on the financial markets. The engineers are prestigious thanks to their skills and their efforts are sought-after by various companies. However, financial engineering is not without its drawbacks.
A noteworthy instance of its criticisms stems from its involvement in the 2008 financial crisis. The number of defaults on subprime mortgage payments would increase, thus there was a trigger of more credit events. CDS issuers – in other words, banks – were unable to make the payments on these swaps. This is mostly because the defaults were occurring at almost the exact same time.
A lot of corporate buyers were taking out CDSs on mortgage-backed securities (MBS) that they were investing in. An MBS is an investment akin to a bond. They largely consist of a bundle of home loans bought from the bank issuing them. Soon afterward, the buyers came to the realization that the CDSs were basically worthless. To reflect the loss of value, they would lower the value of assets on their balance sheets. This would result in additional failures on a corporate level as well as a subsequent economic recession.
The reason for the 2008 global recession happening was mainly because of engineered structured products. Because of this, financial engineering would suddenly become a controversial field. Regardless of its history, this quantitative study would have a hand in improving the financial markets and processes. This is courtesy of introducing innovation, precision, and efficiency to the markets and industry as a whole.
Skills you will need
As you may recall, a lot of people often refer to financial engineering as a quantitative analysis. Quantitative analysts – or ‘quants’ – are responsible for designing and implementing complex models. These models are what permit financial firms to price and trade securities. Investment banks and hedge funds are those who primarily employ them. Sometimes, commercial banks, insurance companies, and management consultancies employ them as well. In addition, financial software and information providers do the same.
A Bachelor’s in Science, a Master’s in Science or a Master’s in Financial Engineering (MFE) will likely lead you to quantitative roles. Such roles include delivering risk models and direct trading, library control, model authentication, risk management, and programming.
Because of the popularity of quants, the level of competition is high for those at the entry-level. Above all else, they need to possess programming skills and also possess knowledge of artificial intelligence methods. On top of that, they need to have a solid understanding of statistical theories. Extensive experience with programming languages such as Python, Java, C++, and Scala is an essential ability for financial engineering.
Beyond these qualifications, you will need to display skills for competitive advantage. The country you are choosing to work in does not matter in the grand scheme of things. Moreover, talent alone is not enough to establish a career in financial engineering. Below is a list of qualities that will help you get through job interviews. They will also assist with ensuring a smooth career for the future.
1 – Skills in communication
Being “smart” is a valuable skill, no doubt, but it is not at all unique. In financial engineering, everyone is “smart,” so if you want to climb up the career ladder, you’re going to need to make yourself stand out. How do other people do that? Well, because they display an articulate communicative nature.
It is important for a financial engineer to be attentive, inquisitive, outgoing, and eloquent. You don’t necessarily have to be precise in your public speaking. However, you need to have the capability of communicating thoughts and ideas in a clear, easy to understand manner.
The universal language of finance is inarguably English. Being able to speak this language fluently will help you in the long-run. If you are not a native English speaker, you should take some crash courses to help speak and write it.
2 – Programming
Every role pertaining to quant finance requires a good set of programming skills. You have no chance of getting a job in this field if you lack the proper knowledge in this particular process. If you are in this position, don’t worry because you can join programming courses. For that matter, you should focus on the following programming languages, among others:
Your understanding of and expertise in programming will be beneficial during job interviews.
3 – Mathematics
Financial engineers need to have a substantial amount of knowledge in an array of mathematics. These include linear algebra, spatial geometry, and stochastic calculus. Moreover, they need to be familiar with differential equations. At the risk of stating the obvious, mathematics is a crucial component in the financial engineering curriculum. It is important that you gain expertise in these concepts because you will frequently use them in simulating financial models.
4 – Finance & Economics
Admittedly, finance and economics are not the most important elements in quantitative trading. They give the professional a solid approach towards the finance markets, but that’s about it. Both hedge funds and banks will typically look for financial engineers with backgrounds in mathematics. Having said that, there are actually plenty of asset managers who opt to bring expert economists on-board. This is especially the case for those with a Ph.D. That is, so long as it is from premier institutes like Ivy League schools.
5 – Information crunching
Market trends come and go, so it is important to be on top of them. It is a financial engineer’s job to remain up-to-date about the latest market trends. The engineer should be prone to frequent readings and crunching information. What’s more, they should be able to apply that information in the development of predictive financial models. It would be smart to subscribe to certain magazines like The Wall Street Journal, Financial Times, and Fierce Finance.
Engineering in crypto
Cryptocurrency mining (or crypto-mining) is a common method of earning, collecting, and creating coins. Think of the practice as a digital form of gold mining. Of course, crypto coins will not multiply on their own. To earn and create more coins, you need to work and be a crypto-miner. It is important to note that the process of crypto-mining is quite difficult.
In simple terms, crypto-mining is akin to the water to a plant. It is essentially the backbone and driving force of a cryptocurrency network. The core point of the process is to update data, validate transactions, and ultimately prevent fraudulent activities.
Miners are the ones responsible for doing that job. Their duties include checking and verifying transactions in order to make sure that users are not trying to double-spend the same coin. The verification of transactions comes from solving complex math puzzles. The first miner who is able to solve a puzzle will place the next block and revise the data on the blockchain. Afterward, the miner will then claim the reward of new coins.
Thanks to the rise in the popularity of cryptocurrency and blockchain, we are starting to see an increase in financial engineering jobs. From them, new jobs for expert developers are appearing almost every day. Software engineer, programmer analyst, business analyst, there are plenty. With that in mind, we can start looking at various careers that are fit for financial engineers.
Financial engineering is a field that is deeply rooted in the world of finance. However, to carry out its functions, it applies the basic principles concerning engineering, programming, and mathematics. A student pursuing a Master’s degree in this particular field will find no shortage of job opportunities across the business industry. Moreover, they will likely be capable of holding down high-level positions within large corporations.
Below are five noteworthy career options for someone who has a Master of Science in Financial Engineering.
1 – Corporate Finance Adviser
A corporate finance adviser is someone with involvement in mergers and acquisitions of other companies. There are several instances in which this person will work for either a large investment bank or corporate advising firm.
If you want a job that is easygoing, this is definitely not the one for you. This job is excessively demanding and it often requires long hours. This is especially true when it comes to finalizing negotiations for deals. Corporate finance advisors may also have the responsibility of assessing a deal’s value. Moreover, they may need to examine cost savings and figure out ways to finance the transaction. They regularly anticipate market reaction and work accordingly with the legal team to officially seal the deal to completion.
Another duty of an adviser is to analyze a business’s balance sheet and identify any noticeable promising investments. In addition, this professional closely examines the financials of target companies. That way, they can determine equitable offers. With the right experience, an adviser will have the ability to discover ways in which to finance the deals. Along the way, it may be essential to expect the reactions of the market. Furthermore, work alongside lawyers in order to reach the completion of the transactions.
2 – Portfolio Manager
A portfolio manager collaborates with clients in an effort to figure out the best investments. This way, they could potentially receive the highest possible returns. This person builds custom-made investment options that draw from someone’s personal details. These include their income, age, and abilities concerning risk management. It is important to remain up-to-date on the latest occurrences in the financial market. Moreover, you need to have solid communication skills. They also need to always be accessible to answer any questions and address concerns.
There are certain commercial banks that have investment portfolio managers. These people help in deciding how to invest in securities and bonds. These individuals need to be sure that the amount of money someone pays in interest to depositors is comparable to the interest they earn from loans. Stocks and similar funds have a volatile nature. Therefore, it is important to maintain flexibility with a company’s plans and work earnestly to reach all goals.
3 – Credit Risk Manager
A person who has a Master of Science in Financial Engineering could potentially work as a credit risk manager for a lending institution. For that matter, it could be a high position. When working for a bank, this person’s duties include assisting and advising management about certain factors. These are primarily trends, performance, and the overall quality of its loan portfolios. Additionally, this person may be responsible for monitoring problematic debt restructurings and defective loans.
If you want to be successful in this career, a graduate needs to be skillful in strategic thinking. Moreover, you need to be able to use creativity to create plans for change. Certification is not mandatory for this job, but it could still help boost personal credibility.
4 – Financial Regulator
In the position of a financial regulator, a person will likely work for the government and supervise financial markets. There are a good number of agencies that operate independently in order to achieve comparable objectives. For instance, someone may get employment with the Commodity Futures Trading Commission. In this case, a person will be responsible for protecting individuals from market manipulation. In addition, they may need to investigate trading practices that are abusive or fraudulent.
On a much higher level, though, someone may work for the Federal Reserve. This particular body has a strong influence on both interest rates and credit markets.
5 – Derivatives Analyst
The main job of a derivatives analyst can be quite difficult. This person needs to collect and closely analyze market data. This includes the supposed value of a stock market at a specific time so that clients make accurate investment decisions. By having a Master’s degree in financial engineering, it indicates that a job candidate has skills in various areas. Particularly in the fields of mathematics or actuarial science.