What Exactly Is Financial Engineering?
Many people are not familiar with the financial engineering major, but financial products in daily life, such as stocks and bonds, are widely known. Many people use them as a means of investment to gain more returns. And investment inevitably comes with market risk. How to create more effective methods or financial products to reduce investment risk in the unpredictable financial market is the research topic of financial engineering.
The 2011 film The Wolf of Wall Street once again focused people's attention on this elite gathering place that has never been less hot than Hollywood. In the film, the stockbroker played by Leonardo DiCaprio earned 12 million US dollars in three minutes and had a fortune of hundreds of millions at the age of 31.
Some say Wall Street is the gathering place of financial talents and financial experts; some say that those who work on Wall Street are either filthy rich or bankrupt; some say money never sleeps on Wall Street. And one word that Wall Street can never do without is finance.
Financial Engineering, Master of Financial Engineering (MFE), is a popular emerging major today. Because it involves knowledge of mathematics, finance, and computer science, the scope of study is extremely broad. Different schools have different names for this major, such as Financial Mathematics, Quantitative Finance, Mathematical Finance, etc. These majors are essentially the same category, with different names but sharing a common feature: using mathematical methods and computer operations to solve financial problems.
The definition of financial engineering first proposed by American finance professor John Finnerty is now widely accepted,
“Financial engineering involves the design, development, and application of innovative financial instruments and methods, and creative exploration to solve problems in finance.”
The International Association of Financial Engineers also gave a broad definition of financial engineering:
“Financial engineering is the introduction of engineering thinking into the financial field, comprehensively adopting various working technology methods (mainly mathematical modeling, numerical computation, network diagrams, simulation, etc.) to design, develop, and implement new financial products, and creatively solve various financial problems.”
In fact, regardless of the definition, the essence of financial engineering is a discipline that uses mathematical tools and computing technology to build financial market models and solve financial problems. Its core is using various derivative financial instruments, such as options, futures, and swaps, to manage various risks in the financial field.
In terms of teaching, financial engineering is an interdisciplinary subject that integrates finance, mathematics, and computer science. Its courses are usually jointly taught by the business school, mathematics department, and engineering school of the university. Since the courses focus on the financial field, the depth far exceeds the financial courses of an MBA. They usually include stock market analysis, portfolio analysis, futures and options, asset pricing, capital budgeting, fixed income analysis, interest rate models, financial risk management, and other courses.
Financial Engineering Curriculum
The American financial engineering curriculum covers four major areas: computer science, mathematics, statistics, and finance. It usually includes courses such as stock market analysis, portfolio analysis, futures and options, asset pricing, capital budgeting, fixed income analysis, interest rate models, and financial risk management.
It also involves mathematics and computer courses, such as calculus, linear algebra; probability theory, measure theory; mathematical statistics; partial differential equations; real variable functions, stochastic processes; numerical methods; C++ programming, algorithms and data structures, etc.
Career Prospects in Financial Engineering
MFE graduates mainly work in investment banks. In addition, commercial banks, fund companies, insurance companies, accounting firms, software companies, and corporate finance departments are also places where MFE graduates seek employment. Government regulatory agencies and energy companies are now also joining the competition for MFE graduates. Financial engineers are called Quants, engaging in work such as risk management, portfolio optimization, design and development of financial products, financial analysis, sales and trading.
Quants include the following types: Desk Quant (develops pricing models directly used by traders); Model Validating Quant (verifies the correctness of models developed by Desk Quants); Research Quant (tries to invent new pricing formulas and models); Quant Developer (writes code, or debugs large-scale systems of others); Statistical Arbitrage Quant (searches for patterns in data for automated trading systems (i.e., arbitrage systems)); Capital Quant (builds the bank's credit and capital models). In the United States, the average annual salary for financial engineering majors is $80,000+, which is 31% higher than the average salary of other jobs; the average annual salary for Quants is $118,000, which is 67% higher than other jobs.
Career Directions in Financial Engineering
Commercial Banks
As a special group in the financial world, banks will play a crucial role in the future development of financial markets. Talents with dual backgrounds will better integrate into the international financial market in any country when engaged in banking-related careers, and often become core personnel.
Now many returnees are also working in the four major state-owned banks in China. After the rapid development of city joint-stock commercial banks, they have switched jobs and become the backbone of city commercial banks and joint-stock commercial banks, many becoming middle managers or even senior leaders.
Securities, Trust, and Fund Companies
That is, securities companies (including fund management companies), trust investment companies, financial holding groups, and other highly risky financial companies.
Securities, trust, and fund companies all rely on risk management for their livelihood. There are systemic risk factors in the industry, but when the industry is booming, it's easier to make money, with higher short-term returns (and higher risks), and they operate under genuine corporate management mechanisms. If you want to develop professionally and achieve something, working in this industry is an excellent choice. Many fund managers and investment bank managers earn annual salaries of over a million.
Recently, the trust industry has re-emerged, adding another choice for graduates in finance and other majors.
Asset Management Companies, Financial Leasing, Guarantee Companies
Asset management companies are similar to policy banks, and their original purpose and role at the time of establishment are gradually fading. The financial leasing and guarantee industry is developing rapidly, and it's worth considering entering. Of course, if you have work experience in banking or securities, you will likely achieve more in this industry.
Insurance Companies, Insurance Brokerage Companies
The actuarial science profession is highly sought after. Social security centers and financial audit departments are places with stable jobs, but stability is sufficient while flexibility is lacking. Of course, friends who hope for steady returns might consider this as an option.
Securities Department, Finance Department, Securities Affairs Representative of Listed (or Pre-IPO) Companies
Working experience in the securities department of a listed company is also valuable, inherently spanning both the securities industry and the industrial side, providing a foothold for further development. If you have been involved in the entire IPO preparation process, it will be even more beneficial for your future career, as it requires strong financial and industrial analysis skills, and you should strengthen learning in these areas.
If You Want to Find a Job in the United States
Jobs in the American financial circle are diverse, but employment can be broadly divided into three categories: buy side, sell side, third party. The buy side is the traditional buyer, most commonly asset management firms. The sell side generally refers to banks, both investment banks and commercial banks, but now some large banks also have buy-side departments. Third party refers to the emerging consulting industry, especially risk control consulting for the financial banking industry.
Students who complete MFE programs can also take the Chartered Financial Analyst (CFA) certification exam in the United States and obtain the CFA charter (obtaining the CFA charter also requires work experience). It should be added that the CFA can only be icing on the cake and does not play a decisive role in job hunting. Besides the CFA, you can also consider the FRM, which mainly assists in employment in the Risk Management direction.
If You Want to Find a Job Back in China
In China, employment is mainly in the following areas:
1. Fund companies — now there is a great need for talents who can do fund performance evaluation, risk control, and asset allocation.
2. Securities companies — currently going through a difficult period, but also seeking survival opportunities through collective wealth management product design, etc.
3. Banks — the most traditional banks are also undergoing subtle changes. Now the head offices of major banks are starting to build internal risk management models and urgently need talents in this area.
Another important department within banks — the treasury department — also needs financial engineering talents. On the one hand, they operate in the interbank bond market and are the main force in the future fixed-income securities sector, as well as the main force in designing financial engineering products such as corporate bond markets and mortgage-backed securities, which have great development potential.
Secondly, financial engineering has obvious regional characteristics in employment. Judging from the current situation in China, graduates of financial engineering majors are mainly concentrated in economically developed areas such as Beijing, Shanghai, and Guangzhou. This is because most investment banks, financial research institutes, securities companies, and other financial institutions are concentrated in these regions, which can provide more positions for students, giving students in these areas certain employment advantages.
Top MFE programs can basically guarantee you a job in investment banking. Hedge funds on the buy side love to hire MFE graduates as Quants. The average first-year salary for MFE graduates is as high as $110,000.
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