Table of Contents
Meaning Of Financial Engineering
Financial engineering involves utilization of mathematical techniques in solving financial problems. This process uses tools and knowledge from the fields of economics, statistics, applied mathematics and computer science. These tools not only assist in solving the prevailing financial issues but also help in devising innovative financial products. Financial engineering is also known as quantitative analysis. Investment banks, commercial banks and insurance agencies use this technique.
After knowing the meaning of financial engineering, we’ll see how it works.
How Financial Engineering Works?
Financial engineers create, design and implement new financial models and processes in order to find solutions for problems. They always seek new financial opportunities. Preparing such models requires a great deal of research and they rely on in-depth data analysis, simulations, risk analysis and stochastics. Financial engineers possess knowledge in fields such as economics, statistics and corporate finance. These engineers work in banking, consulting agencies, securities and financial management.
After knowing about the concept of financial engineering, we will see the factors influencing it.
Factors Influencing Financial Engineering
The following are the factors that influence the growth process of financial engineering:
These are the factors which exist in the external environment. Environmental factors have a direct impact on the firm.
These factors are not controllable. Political, Economic, Social and Technological (PEST) analysis can be conducted to determine these factors and their impact on the business. Common examples of environmental factors are technological advancements, new inventions, competitiveness and political and economic changes.
Intra Firm Factors
These factors are controllable by the firm and directly affect the financial engineering process. Examples of intra firm factors are accounting policies, risk aversion, agency costs and liquidity needs.
Financial engineering can benefit organizations in finding solutions to various problems such as risk management, scenario simulation and new product development. However owing to the ever-increasing financial innovation, there is a perpetual demand for highly skilled financial engineers.1,2