Financial Engineering

Written By
Paul Tracy
Updated August 5, 2020

What is Financial Engineering?

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

How Does Financial Engineering Work?

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 Does Financial Engineering Matter?

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.