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Financial Engineering: The Savior Or End Of Engineering Economy?

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Conference

2007 Annual Conference & Exposition

Location

Honolulu, Hawaii

Publication Date

June 24, 2007

Start Date

June 24, 2007

End Date

June 27, 2007

ISSN

2153-5965

Conference Session

The Evolution of Engineering Economy

Tagged Division

Engineering Economy

Page Count

6

Page Numbers

12.742.1 - 12.742.6

Permanent URL

https://peer.asee.org/2463

Download Count

250

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Paper Authors

biography

Joseph Hartman Lehigh University

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Joseph C. Hartman is an Associate Professor in the Department of Industrial and Systems Engineering at Lehigh University, holds the George Kledaras Endowed Chair, and serves as Department Chair. He received his Ph.D. (1996) and M.S. (1994) in Industrial Engineering from the Georgia Institute of Technology and B.S. in General Engineering from the University of Illinois at Urbana-Champaign (1992). His research interests are in economic decisions analysis and dynamic programming. His undergraduate textbook, "Engineering Economy and the Decision-Making Process," was released in the summer of 2006. He is an active member of ASEE, IIE, and INFORMS and currently serves as Editor of "The Engineering Economist" and the Senior Vice President of Publications on the IIE Board of Trustees.

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David Enke University of Missouri

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Abstract
NOTE: The first page of text has been automatically extracted and included below in lieu of an abstract

Financial Engineering: The Savior or End of Engineering Economy?

Abstract

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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