As the era of big data and mega-processors advances, so too does the complexity of the world of business finance. The bonds, stocks, and loans that dominated finance in the past today share space with derivatives, credit default swaps, futures contracts, and other advanced instruments driven by complex financial models. As a result, gone are the days of back-of-the-envelope calculations, supplanted by supercomputers crunching terabytes of data through Gordian algorithms. Somebody needs to know how to aggregate that data, how to write those algorithms, and how to make sense of the results. Cue the financial engineers.
Financial engineering is an interdisciplinary field drawing from business, computer science, mathematics, and engineering. Financial engineers apply expertise in computer programming and mathematical theory to develop solutions to problems in business finance. Ideally, financial engineers create empirically derived models to guide decisions on investments, sales of assets, borrowing, lending, and risk management.
Financial engineers create and develop new financial products, manage financial risk, develop investment plans, design portfolios and systems for managing portfolios, and predict foreign exchange movements and develop Forex funds. Increased automation in trading and other transactions has created further opportunities for financial experts, whose skills in computer science, mathematics, and business are a perfect fit to this growing sector.
__(While we've got you: Here Are the Top Online Master's in Financial Engineering Degrees)__
While the field is grounded in the principles of mathematics and science, Columbia University professor Emanuel Derman warns that "those people who consider coming into the field from one of the hard sciences should understand that financial engineering rests on a shaky basis. That’s not to say that it isn’t worth doing. In one sense it makes it more interesting. If you’re going to work in this field, you have to understand that you’re not doing classical science at all, and that the classical scientific approach doesn’t have the unimpeachable value it has in the hard sciences. You have to ask yourself if you can live with that." To picture just how far off the science can go, remember that financial engineering created credit default swaps, which played a significant role in causing the 2008 financial crisis.
A Master of Science in Financial Engineering is a multidisciplinary degree that typically involves the faculties and facilities of several schools within a university. The school of business is typically involved, as is whichever school(s) oversee mathematics and computer science (this is often the school of arts and sciences, although some universities set up separate schools for computer science, e.g. Stevens Institute of Technology's School of Systems & Enterprises). The school of engineering sometimes participates as well.
Compared with a Master of Finance degree, MSFE courses "are more quantitative in nature" and significantly more likely to require you to employ software coding skills, notes Linda Kreitzman, executive director of Berkeley's financial engineering program. Curricula typically include courses in financial risk management, probability, quantitative methods, stochastic processes, pricing and hedging, derivatives, portfolio theory, and computational methods in finance. MSFE programs are accredited by the International Association of Quantitative Finance (IAQF).
Program applicants needn't have undergraduate degrees in business, mathematics, or computer science to gain admission, but such students are most likely to have the considerable prerequisite coursework in computer science (with programming skills in Python, Java, or C++), calculus, advanced calculus (including Taylor series), differential equations, linear algebra, and probability theory necessary to succeed. This is a quant-heavy program, and those lacking advanced math skills will not last long. Experience in data mining, which figures heavily in the discipline, and of course an interest in finance are also important.
According to the IAQF, "a majority of successful candidates have degrees in pure and applied mathematics and engineering. Other majors with significant representation include computer sciences, physics, engineering, economics and a variety of liberal arts majors. Despite the concentration in mathematics and engineering, the important common factor among students is a foundational level of training in mathematics and computer programming and a strong interest in finance and financial markets."
Financial engineers find employment across business and government. Employers include investment banks, hedge funds, corporate treasuries, stock brokerages, insurance companies, commercial banks, actuarial firms, and regulatory agencies. Financial engineers find roles as brokers, traders, analysts, actuaries, risk managers, and data scientists. Their skill set makes financial engineers uniquely qualified to price and sell derivatives, and many seek careers in this sector.
As the job market for financial engineers grows, so too do the opportunities for those holding master's degrees. "Wall Street used to hire mostly Ph.D.s for their quantitative units, especially Ph.D.s in physics," notes Steven Allen, Deputy Director of the Mathematics in Finance Masters at New York University, "Now they like our graduates, who have more direct training in finance." Payscale.com reports a median annual salary of $76,602 for financial engineers, with a salary range from $64,000 to $116,000. Bonuses range from just over $2,500 to just over $30,000.
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