June 24, 2007
June 24, 2007
June 27, 2007
12.742.1 - 12.742.6
Financial Engineering: The Savior or End of Engineering Economy?
There has been a major push into the field of “financial engineering” in the last few years, although the field has been growing in both research and education for over two decades. Initially, the field was described as the design (engineering) of financial products (i.e., derivatives), but now it has a much broader interpretation, including the application of advanced tools (i.e., mathematical programming or stochastic processes) to the analysis of financial instruments with the goal of increasing profits and/or decreasing risk. As this field has grown, so have the employment opportunities for engineers in the financial sector, including jobs as analysts with investment banks, hedge funds, brokers, and insurance companies. This has resulted in a number of schools offering graduate programs in Financial Engineering (or similar areas, such as Computational Finance, Mathematical Finance, Quantitative Finance, and Analytical Finance). Inevitably, and in our experience, demand is growing at the undergraduate level for such a major. If offered, it would seem natural that the degree would come from an industrial engineering, engineering management, operations research or systems engineering department. We examine how schools are addressing this issue and also ponder the requirements for such a degree and how it may or may not impact the “traditional” offering of engineering economy.
Introduction: Trends and Needs
Engineering economy is a mature field, which draws its roots back to the turn of the century. Broadly defined, engineering economy is concerned with the time value of money and economic decision analysis. Studies are generally tied to capital budgeting decisions and may utilize decision criteria, such as present worth or internal rate of return, sensitivity analysis, simulation, and even mathematical programming (advanced studies) in order to make investment decisions.
The newer field of “financial engineering” has been growing over the past few decades in both educational offerings and research. Broadly defined, financial engineering is the application of advanced mathematical and engineering tools, such as mathematical programming, stochastic processes, or simulation, to the analysis of financial instruments, primarily financial derivatives. In essence, financial engineers attempt to either design new over-the-counter financial products that define and manage unique risk and return between two parties, or simply take existing securities and engineer new ways to hedge current positions. Commensurate with the goals of most financial firms, the aim of the analysis is to increase returns, reduce risk, and/or increase efficiency.
With the growing interest of financial firms, including investment banks, brokers, and insurance companies to hire engineers for jobs traditionally filled by accounting and finance majors, there appears to be a growing interest for engineering departments (most likely industrial and/or systems) to provide more education in the areas of financial risk management. This has fueled the growth in financial engineering.
Hartman, J., & Enke, D. (2007, June), Financial Engineering: The Savior Or End Of Engineering Economy? Paper presented at 2007 Annual Conference & Exposition, Honolulu, Hawaii. https://peer.asee.org/2463
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