A multidisciplinary field, Financial Engineering uses computational and mathematical finance knowledge to determine the potential and risks of a financial investment instrument.
FinanceWalk presents a detailed Financial Engineering career guide to finance aspirants.
What is Financial Engineering?
The Norman and Adele Barron Professor of Management at Boston University, Zvi Bodie, defined Financial Engineering as:
“the application of science-based mathematical models to decisions about saving, investing, borrowing, lending, and managing risk” (Source).
The field of Financial Engineering is regulated by the International Association of Financial Engineers established in 1992 and the first approved curriculum was at the Polytechnic Institute of New York University.
Financial engineering is applicable to derivatives pricing, financial regulation, execution, corporate finance, portfolio management, risk management, trading and structured products.
Financial Engineering Career Overview
The financial engineers are specialists making use of mathematical formulas, programming and engineering methods in financial theories, and analyses market trends to build data-backed financial models.
Companies often employ people with advanced degree in Financial Engineering and these specialists work as investment managers, bankers or traders using their financial engineering background to improve the quality of existing investment products.
The primary responsibility of a financial engineer is to have thorough knowledge of financial markets, its volatility and knowledge of financial theories. This knowledge is used by engineers to develop simulations and predict market behaviour. Of course, the predictions aren't always accurate, any unexpected issue may happen in the financial market but the risk potential reduces. Since a financial engineer knows about market trends and previous market performances, the knowledge is used to make future investment predictions.
Apart from knowledge in finance, the engineer needs to possess sufficient computer programming skills. Programming skills are needed to build simulating financial models to learn about market behavior. Through these simulations, the financial engineer is expected to generate results, as much as accurately possible.
Most of the financial engineers work in the field of financial risk management and as financial analyst. With the knowledge of computer simulations and market trends, the engineer helps to develop profitable investment plans for individuals and companies. Often, these investment plans have high risk factor, which might seem counter-productive to the goal of hiring financial engineers, but that’s a strategy used by risk management firms to yield higher return than comparatively stable investments. Companies and high net-worth individuals often take help from financial engineers to design a portfolio which places the complete investment capital at risk.
As a financial analyst, the financial engineer creates real-time financial simulations to predict the future behavior of the market.
In the last decade, governments and financial institutions have started to actively hire financial engineers for advising or consulting governments (local, state or central) with market economies.
As a financial engineer, you can associate yourself as an employee of any reputed financial institution or setup your own consultancy, or do both.
Financial engineers are popularly known as “quants”.
Preparing for Financial Engineering Career: Education and Skills
If you really want to establish a career in financial engineering, you need to know various things to become a preferred job candidate.
In qualifications, a Bachelors’ in Science, a Master’s in Science or a Masters’ in Financial Engineering (MFE) will gear you towards quantitative roles such as delivering risk models and trading directly, library control, model validation, risk management and programming.
Many of the financial engineers don’t hold PhD as some employers feel the degree will have detrimental impact. A Masters’ degree in computer engineering and electrical engineering with strong programming skills and data handling ease is recommended.
Mathematical geniuses can go for PhD. Knowledge in programming like SAS, MATLAB, S+ or RAD or other statistical packages will place you at a disadvantage as higher advanced languages like Java and Scala are used.
The financial engineering coursework generally consists of Applied Mathematics, Operations Research, Theoretical Physics, Mathematics, Computer Science, Computer Engineering, Mechanical Engineering and Electrical Engineering.
There is a high need for qualified quants in the market. The demand for new quants is particularly high in structured finance establishments. Over time, as the market gains higher traction, the demand for quants will increase. Emphasis will be on credit and risk ventures.
Moreover, the world of systematic, quantitative, algorithmic and automated trading offers various openings for quants.
The level of competition is high for entry-level quants as they need to display programming skills, knowledge of artificial intelligence methods and statistical theories. Good experience with languages like Python, Java, C++ and Scala is essential for financial engineering.
If you’re looking for financial engineering jobs currently, search with hedge funds, asset management firms, banks and proprietary trading companies. Hedge funds and asset management firms are favorably positioned in the investment market in the next decade. Banks are grappling with regulations and proprietary trading companies also suffer from regulatory issues, in countries like UK and USA.
Apart from qualifications, you need to possess skills for competitive advantage, it doesn’t matter which country you choose to work. Talent alone will not help in establishing financial engineering career. To start with, we enlist some things which will get you through during job interviews and ensure a smooth career ahead.
1) Communication Skills
You’re not unique. Anyone working as a financial engineer is ‘smart’ and the only reason why some people move ahead in the career ladder is because of their articulate communicative nature. A financial engineer should be thoughtful, inquisitive, outgoing and articulate. You don’t need to be a refined public speaker but have the ability to communicate thoughts and ideas clearly.
The universal language of finance is English. If you aren’t a native English speaker, take some crash courses to help with speaking and writing abilities.
Every role of quant finance requires good programming skills. Join programming courses and concentrate on .NET, Hadoop, Java, C++, Perl, Python, C#, MATLAB and other programming languages. Your programming knowledge and expertise will work in your favor during job interviews.
Financial engineers need to be learned in linear algebra, stochastic calculus, spatial geometry and familiar with differential equations. Mathematics is a part of the financial engineering curriculum and you need to gain expertise in these concepts as they will be frequently used in simulating financial models.
4) Finance and Economics
Finance and economics aren’t that important in quantitative trading, other than giving the professional a well-developed approach towards the finance markets. Hedge funds and banks frequently seek financial engineers with math background. However, there are asset managers who choose to appoint trained economists, especially those with PhD, if it’s from premier institutes like Ivy League schools.
5) Crunching Information
A financial engineer needs to remain abreast of latest market trends. The engineer should have a habit of frequent reading, crunching information and applying them for developing predictive financial models. Subscribe to magazines like Financial Times, The Wall Street Journal and Fierce Finance.
A well-trained and expert quant can easily separate him / her from the competition and rise higher in financial engineering career.
Getting an Internship
The moment you become a college freshman, get an internship position with financial institutions. A lot of advantages are in store. You get a glimpse of how it is going to work in a full-time atmosphere and learn from senior financial engineers. Moreover, interns are rotated in departments so you get an idea of how departments work. With good working record, you can be retained by the investment banking company once the college years are over. You meet and network with various professionals. Engage with them even after they move to other companies because “it’s not what you know, it’s who you know”.
Getting an internship is highly recommended than getting a full-time financial engineering job.
Financial Engineering Courses
Here is a list of top universities offering financial engineering courses. Note that no Indian university is listed because Indian courses are mostly Certificate courses and therefore, if you’re from India, go for CFA, CQF and FRM courses.
Globally top ranked universities for financial engineering courses are as follows. Most of them are based in USA and UK.
- American University, USA
- Bar-Ilan University, Israel
- Baruch College, New York University, USA
- Bogazici University, Turkey
- Boston University School of Management, USA
- Carnegie Mellon University, USA
- Case Western Reserve University, USA
- Claremont Graduate University, USA
- Clark University, USA
- Columbia University, USA
- Cornell University, USA
- DePaul University, USA
- Dublin City University, Ireland
- Florida State University, USA
- Fordham University, USA
- George Washington University, USA
- Georgia Institute of Technology, USA
- Georgia State University, USA
- Hong Kong University of Science and Technology, China
- Imperial College Business School, UK
- Kent State University, USA
- Lehigh University, USA
- McMaster University, Canada
- Nanyang Technological University, Singapore
- North Carolina State University, USA
- NYU Polytechnic Institute, USA
- Oklahoma State University, USA
- Princeton University, USA
- Queens College, USA
- Renseelaer Polytechnic Institute, USA
- Stanford University, USA
- Stevens Institute of Technology, USA
- Technical University, Austria
- University of Alabama, USA
- University of Arizona, USA
- University of Birmingham, UK
- University of California (Berkeley, Los Angeles, Santa Barbara), USA
- University of Connecticut Storrs, USA
- University of Dayton, USA
- University of Florida, USA
- University of Illinois, USA
- University of Limerick, USA
- University of Minnesota, USA
- University of Neuchatel, Switzerland
- University of Oxford, UK
- University of Southern California, USA
- University of Technology, Australia
- University of Witwatersrand, South Africa
- University of Tulsa, USA
- University of Twente Enschede, The Netherlands
- University of Waterloo, Canada
- University of Western Ontario, Canada
- University of Wisconsin, USA
- Washington University, USA
- Worcester Polytechnic Institute, USA
- York University, Canada
Financial Engineering Salary Scales
A comparison between two countries – USA and India – is presented here to show the financial engineering salary scales and other factors like job satisfaction, gender ratio and other benefits. All data is sourced from PayScale.com.
Financial Engineering in USA
The median salary of financial engineers in USA is 91,330 USD.
The minimum and maximum salary ranges are 49,944 USD and 145,437 USD with a bonus amount between 2000 USD and 32,000 USD. The individual experience level and location impact the salary range, with experience years wielding the highest influence.
The data below shows how experience impacts the salary scale of financial engineers.
In gender ratio, 21% and 79% are the figures of female and male financial engineers.
About 43% of the financial engineering graduates have 1-4 years of experience, followed by 23% in the bracket of 5-9 years and 17% in the bracket of less than one year. Speaking of which, you should also read this Business Insider article published in 2011, which revealed that “interns” at Wall Street Journal firms earned about 100,000 USD in pay check!
Also, common health benefits offered to financial engineers in USA are mentioned below.
Financial Engineering in India
Coming to India, PayScale.com doesn't give us much data as financial engineering is a relatively new field. However, going by what data is available, if you have Masters in Science with Financial Engineering Degree, and 1 to 4 years of experience, your salary can go beyond 900,000 INR.
Between 1 and 4 years is the common experience years available here and the popular city to work as a financial engineer is New Delhi where the median annual pay is 624,000 INR.
A financial engineering career has immense potential in the future financial market. If you’re interested to enter the finance industry and possess good mathematical and scientific knowledge, go for financial engineering career.