What is Financial Engineering?

Financial engineering is best described as the application of mathematical methods to help solve financial problems. It’s also known as computational finance, mathematical finance, or financial mathematics. Whereas most engineering disciplines utilize science, math, and physics, financial engineering uses tools from statistics, computer science, economic theory and applied mathematics. The only similarity to regular engineering is that these professionals are called financial engineers.

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What is a Financial Engineer?

Before we describe what a financial engineer is, we’ll say what he is not, which is an engineer. Despite not being engineers, many financial engineers have engineering backgrounds. Financial engineers are highly-educated professionals who play an important role in the fields of investment strategizing and risk management. Through the use of quantitative analysis, they develop successful financial models and solve financial problems. Their use of algorithms, mathematical rules and computer science to assist them in solving financial problems has also earned them the title of computational engineers.

Financial engineers typically work in investment banks, insurance companies, hedge funds, commercial banks, regulatory agencies corporate treasuries. The stock market is a good example of what a financial engineer might do. Using his skills and knowledge, he’ll predict how certain stocks or bonds might perform and make recommendations on how to avoid risky investments.

How to Become a Financial Engineer

Becoming a financial engineer requires completing a master’s degree program in engineering finance or a related field. Students enrolled in a financial engineer program should have a strong background in computer programming, calculus and engineering probability. The program includes courses in mechanical engineering, computer science, applied mathematics, electrical engineering, operations research and theoretical physics. Other courses often found in this program include the following.

  • Software Engineering for Finance
  • Financial Markets and Securities
  • Fundamentals of Trading
  • Numerical Methods for Finance
  • Credit Risk Models
  • Fixed Income Risk Management
  • Current Topics in Mathematical Finance
  • Advanced Risk and Portfolio Management

The financial engineer student also will complete a capstone project where he or she has to solve a real-world problem using the financial tools taught in the program. Students are encouraged to complete an internship at a financial institution to obtain hands-on training. Continuing education is also necessary to keep up with the constantly changing financial environments.

Career Outlook for Financial Engineers

Financial or computational engineering is a profession that’s growing very rapidly. Financial engineers are expected to see a job growth of 14 percent by 2024 with about 32,300 new jobs created by that time, according to the Occupational Information Network. Financial engineers earned wages ranging from $60,200 to $137,462 with the average annual wage at $80,000, according to an August 2018 report by PayScale. The two factors that can affect their wages are years of experience on the job and geographic location. An interesting fact is that the majority of financial engineers in the United States are men.

Despite how volatile the finance industry can be, financial consultants and engineers continue to be in demand. As the economy continues to grow, professionals in the financial industry will have many opportunities to play an important role in helping companies thrive and be profitable. Working in the field of financial engineering is a great way to have a career where services are vital and rewarding.