In this article we will discover together Financial Engineering. In particular, we will talk about what it is and its main areas of application.
Financial Engineering is a multidisciplinary and recently developed field. It combines methods and models for economics and finance, engineering and mathematics, statistics and computer science.
The aim of this field is to create new financial products or to combine alredy existing ones.
One of the main reasons for Financial Engineering birth is the need to design and implement products and financial instruments with high customization features. These are suitable for an optimal management of high degrees of risk. In this way, often, are designed and structured ad hoc operations to meet the firms’ needs of hedging.
Even the financial institutions, the government and private individuals make use of Financial Engineering, perhaps even unconsciously. Typical tools are portfolio management, wealth management, asset allocation, bonds valuation, the analysis of returns, fundamental analysis, derivatives valuation, risk management.
The first degree courses in Financial Engineering were established in the early 90s. The number and the scope of programs have grown rapidly. Today we use the term “financial engineer” to indicate someone who has a degree in this field.
An older and inaccurate Financial Engineering definition concerns the aggressive restructuring of corporates’ balance sheets. Generally, but not always, it is also identified with a negative connotation to represent someone who benefits from these restructuring operations at the expense of workers and investors.
Financial engineering is sometimes referred to as quantitative analysis. It is used by regular commercial banks, investment banks, insurance agencies and hedge funds.
In fact, the Financial Engineering plays a very important role in analyzing and reworking of a staring financial situation (often in critical conditions) into a new financial situation more balanced and appropriate to the customers’ needs.