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What Does a Financial Engineer Do?

By C.B. Fox
Updated Mar 03, 2024
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A financial engineer works with a variety of different tools to determine the risks and potential of financial investment. These specialists work extensively with mathematical formulas and computer programs in order to create sophisticated models of market trends and risks. Though companies may employ a person with an advanced degree in financial engineering as such an engineer, it is more common for these specialists to work as traders, bankers, or investment managers, and to utilize their financial engineering background in these careers in order to improve the quality of services they can provide to their clients.

One of the main responsibilities of a financial engineer is to know a great deal about financial theory and the behavior of various financial markets. These engineers use this knowledge when creating tools or simulations that will help them to make predictions about the future behavior of a market. Though unexpected events can arise in any financial market, a knowledge of past market behavior and the theory that explains that behavior will help the financial engineer extrapolate from the past to make predictions about the future.

In addition to having a strong foundation in this knowledge base, the financial engineer needs to be adept at computer programming. The engineer uses programs to design simulations of market behavior. Though these programs cannot always predict the way the market will shift, a financial engineer is expected to be able to come up with reasonably accurate results based on the simulations the engineer has designed.

Many financial engineers work in the field of financial risk management. Using a knowledge of the market and computer simulations, a financial engineer can form an investment plan that includes as much of a risk factor as a person or company desires. While it may seem counter-intuitive to desire a greater amount of risk, riskier investments tend to pay off at higher yields than investments that are considered to be more stable. A person or company may turn to a financial engineer to design an investment portfolio that places some, all, or none of the investment capital at risk.

A financial engineer may also work as a financial analyst. These engineers use their knowledge and computer simulations to make predictions about the future behavior of the market. Many people with these skills may work for banks or other financial institutions, though there are also government jobs available for specialists in this field. These specialists may be employed to make recommendations to local, state, or federal government with regard the economy.

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Discussion Comments
By anon296689 — On Oct 12, 2012

A financial engineer should not confine his job only to the areas of corporate finance, portfolio risk analysis, market behavior pattern analysis by using advance mathematical software. Financial engineering may focus on wide areas of financial management, like the development of new and high yield financial derivatives, new financial products and services combining and restructuring two or more products. It can also work for improving banking and other service delivery channels.

By MrMoody — On Mar 03, 2012

@allenJo - I agree, and believe that risk management is a better use of the kind of knowledge that you gain from this kind of work, not so much an ability to pick a lucky stock.

In that sense, I believe that financial theory has been proven to be effective time and again. The general advice not to put all your eggs in one basket, and instead build a portfolio with a mix of aggressive and conservative investments seems to hold true. That’s just one example.

By allenJo — On Mar 02, 2012

@Mammmood - I wonder how closely financial theory mirrors what actually takes place in the financial markets. I think if it really was consistent, more people would be making money in stocks than they are.

There always seems to be a curve ball that throws off your best estimates about the direction that the market is going to take. I like to call this the “X” factor, which is really an unknown. It can be world events, some utterance from the Federal Reserve chairman, and unexpected scandal in the business community, whatever.

But it’s what sends markets diving (or rising) as the case may be in my opinion. I don’t think that computer programs are good at anticipating these variables and so they’re not that effective.

By Mammmood — On Mar 01, 2012

@Charred - It does sound interesting that’s for sure. I am sure it pays well too. While I don’t have numbers on hand I’ll bet that the financial engineering salary is quite high. This is because, as you point out, it’s very specialized.

Engineers and programmers make a lot of money; financial analysts do well too. So if you combine both skills you probably wind up with a niche profession that will pay well.

I think if you want to get into this you should probably take a combination of engineering and finance courses in college. There are probably some business schools that teach this stuff too.

By Charred — On Feb 29, 2012

I love the blend of skill sets for a financial engineer. Financial engineering jobs bring together both technical and business skills. I wonder if these guys help develop the fancy stock software that some companies peddle?

These programs attempt to help you to pick out when to buy and sell stock based on trends and patterns and stuff like that. Personally, I doubt that any such software product is a silver bullet, otherwise everyone would be using it.

But there is a good deal of technical analysis with stock market predictions. I think that the computer programming component of this job will help you automate that analysis.

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