FINANCIAL ENGINEERING

Financial engineering is a multidisciplinary field involving financial theory, the methods of engineering, the tools of mathematics and the practice of programming.It has also been defined as the application of technical methods, especially from mathematical finance and computational finance, in the practice of finance.

Financial engineering draws on tools from applied mathematics, computer science, statistics andeconomic theory. In broadest definition, anyone who uses technical tools in finance could be called a financial engineer, for example any computer programmer in a bank or any statistician in a government economic bureau. However, most practitioners restrict the term to someone educated in the full range of tools of modern finance and whose work is informed by financial theory. It is sometimes restricted even further, to cover only those originating new financial products and strategies.

The main applications of financial engineering are to:

  • corporate finance
  • derivatives pricing
  • execution
  • financial regulation
  • portfolio management
  • risk management
  • structured products
  • trading

Criticisms

The best known critic of financial engineering is Nassim Taleb, a professor of financial engineering atPolytechnic Institute of New York University who argues that it replaces common sense and leads to disaster. Many other authors have identified specific problems in financial engineering that caused catastrophes: Aaron Brown named confusion between quants and regulators over the meaning of “capital”, Felix Salmon fingered the Gaussian copula, Ian Stewart criticized the Black–Scholes formula, Pablo Trianadislikes Value-at-Risk and Scott Patterson  accused quantitative traders and later high-frequency traders.

A gentler criticism came from Emanuel Dermanwho heads a financial engineering degree program at Columbia University. He blames over-reliance on models for financial problems.

https://thefinancialengineer.org/2013/02/11/emanuel-derman/

Reference: Wikipedia

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