Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Financial Engineering

What it is:

Financial engineering is the quantitative, technical development of financial strategies and products.

How it works (Example):

Financial engineers design, create and implement new financial instruments, models and processes to solve problems in finance and take advantage of new financial opportunities. A great deal of research goes into these models and theories and they rely on in-depth data analysis, stochastics, simulations, and risk analysis. Financial engineers apply their knowledge in several academic fields, including corporate finance, economics and statistics. Financial engineers work in the securities, banking, financial management and consulting industries.

Financial engineering sometimes also refers to the strategies companies use to maximize profits or other important performance metrics. Examples include creating derivatives that address unusual risks faced by a party to a transaction, structuring a purchase or sale in a way that better addresses the interests of the buyer and the seller, and using new methods to compute the fair market value of new or existing financial instruments.

Why it Matters:

Many financial engineers say that financial engineering involves as much creativity as is does technical knowledge, because the field is a pioneering, innovative one.  The evolution of cheaper, faster computers has greatly expanded the financial engineering field.

Financial engineering is somewhat controversial, and some believe that it increases any economy's systemic risk instead of decreasing it. For example, financial engineering is largely responsible for the development and use of derivatives like credit-default swaps and mortgage-backed securities that were blamed for the near financial meltdown in 2007-2008.

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...