Financial Engineering

Written By
Paul Tracy
Updated June 30, 2021

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.

Activate your free account to unlock our most valuable savings and money-making tips
  • 100% FREE
  • Exclusive money-making tips before we post them to the live site
  • Weekly insights and analysis from our financial experts
  • Free Report - 25 Ways to Save Hundreds on Your Monthly Expenses
  • Free Report - Eliminate Credit Card Debt with these 10 Simple Tricks
Ask an Expert
All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Financial Engineering.
Be the first to ask a question

If you have a question about Financial Engineering, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

If you have a question about Financial Engineering, then please ask Paul.

Ask a question Read more from Paul
Paul Tracy - profile
Ask an Expert about Financial Engineering

By submitting this form you agree with our Privacy Policy

Don't Know a Financial Term?
Search our library of 4,000+ terms