Financial engineering uses mathematical finance and numerical methods to support trading, hedging, investment, and risk management decisions. Traditionally associated with sell-side financial instrument pricing, valuation, and risk analysis, the term financial engineering is also used broadly to refer to quantitative analysis in all finance disciplines and Master of Financial Engineering degree courses.
Researchers, quants, and analysts in banks, hedge funds, and asset management firms may perform the following financial engineering tasks:
- Price instruments including equity options, credit derivatives, commodity derivatives, and FX derivatives with Black Scholes, Black-Derman-Toy, Heath-Jarrow Morton, and Cox-Ross-Rubinstein models
- Analyze interest rates with Hull-White, Black-Karasinski, and LIBOR market model methods
- Build and analyze swap curves, zero curves, and other yield curves with Nelson-Siegel and Svensson equations, as well as splines
- Analyze stochastic volatility models such as Heston and Hull-White/Vasicek