There are numerous definitions of financial engineering, but most revolve around managing and reducing financial risk. A few definitions from popular books and web sites include the following:

"Financial engineering refers to the application of various mathematical, statistical and computational techniques to solve practical problems in finance. Such problems include the valuation of derivatives instruments such as options, futures and swaps, the trading of securities, risk management and regulation of financial markets. No single set of mathematical tools, computational techniques or financial theory describes financial engineering. Rather, it is the synthesis of a variety of these elements. Financial engineering is a practical field and a practitioners’ field by its nature. It is driven in large part by practical problems that arise in the course of daily business; the nature of the problems demand that practitioners draw from as broad a palate of tools as possible to find the best solutions to their problems. A second, related definition is that financial engineering is the use of financial instruments such as forwards, futures, swaps, options, and related products to restructure or rearrange cash flows in order to achieve particular financial goals, particularly the management of financial risk." Source: International Association of Financial Engineers - FAQ

"The process of financial engineering can be ... viewed as the 'fine-tuning' of an existing financial product to improve its return or risk characteristics in light of changing market conditions. It can be considered as a process which allows existing financial products to be overhauled and restructured to take advantage of changed taxation, legal or general economic climate." Source: Eales, B., Financial Engineering, St. Martin's Press, 2000.

"Financial Engineering is the use of financial instruments to restructure an existing financial profile into one having more desirable properties." Source: Galitz, L., Financial Engineering: Tools and Techniques to Manage Financial Risk, Irwin Professional Publishers, 1995.

"Financial Engineering is the lifeblood of financial innovation - the process that seeks to adapt existing financial instruments and processes and the develop new ones so as to enable financial market participants to cope more effectively with the changing world in which we live." Source: Marshall, J.F, and V.K. Bansal, Financial Engineering, Kolb Publishing Company, 1993.

Usually the primary goal of Financial Engineering is to reduce financial risk. A secondary goal is to restructure cash flows for better financial management, such as using a swap to change a variable rate loan to a fixed rate loan for tax purposes and/or better cash flow predictability.

Financial Engineering often uses financial derivative products, such as options, futures, forwards, and swaps, among others. Bonds and various fixed-income securities are also used for hedging purposes.

Financial Engineers need a good understanding of investment models, security valuation techniques, market efficiency, and portfolio theory. Value-at-Risk (VaR) techniques are also used for understanding market and portfolio risk.

A firm understanding of statistics, statistical distributions, and Monte Carlo simulation is necessary. Forecasting techniques, such as regression, exponential smoothing, moving averages, ARIMA, and GARCH are popular for time series analysis. Understanding Ito processes, stochastic processes, geometric Brownian motion, the random walk model, Fourier transforms, partial differential equations, and game theory is also important.

Computer skills (C / C++, Java, Spreadsheets, Databases) are necessary. Finally, tools in computational intelligence, such as neural networks, fuzzy logic, genetic algorithms, chaos, artificial life, and intelligent agents are being used by some financial engineers for optimization, forecasting, and understanding market dynamics.

Since Financial Engineering is quantitative and computational in nature, Financial Engineers are often called "Quants." Initial jobs for Quants often involve number crunching, simulation, and analysis. With experience, Quants begin to trade, structure portfolios, and engineer custom securities and financial products. Financial Engineers are Quants who are typically more focused on financial risk reduction. Careers are dynamic and compensation is often excellent.

While eventually gaining experience in finance and investment is necessary, students are often not required to have an undergraduate degree in finance or economics to pursue a graduate degree with an emphasis in Financial Engineering. What are necessary are computer skills and a solid background in mathematics. As such, many students that pursue a graduate degree in Financial Engineering have an undergraduate degree in Engineering, Mathematics, Computer Science, or a physical science, such as Physics.

International Association of Financial Engineers
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      IAFE - Core Body of Knowledge
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Financial Engineering News
Financial Engineering and Risk Management Information
Laboratory for Financial Engineering at MIT
Real Options Resource
All About Value-at-Risk (VaR)
Risk Glossary
Futures and Options Resource on the Web
Firms using Financial Engineering
Contingency Analysis (Risk Links)
Game Theory Resource