what is financial engineering 
financial engineering is an area of the financial sector that utilizes computer science statistics economics and applied mathematics to solve quantitative financial problems financial engineering is used to analyze the financial markets address current financial issues and devise new and innovative financial products financial engineering is sometimes referred to as quantitative analysis and is used by regular commercial banks investment banks insurance agencies and hedge funds understanding financial engineeringthe financial industry is always coming up with new and innovative investment tools and products for investors and companies most of the products have been developed through techniques in the field of financial engineering using mathematical modeling and computer science financial engineers are able to test and issue new tools such as new methods of investment analysis new debt offerings new investments new trading strategies new financial models etc financial engineers run quantitative risk models to predict how an investment tool will perform whether a new offering in the financial sector would be viable and profitable in the long run and what types of risks are presented in each product offering given the volatility of the markets financial engineers work with insurance companies asset management firms hedge funds and banks within these companies financial engineers work in proprietary trading risk management portfolio management derivatives and options pricing structured products and corporate finance departments types of financial engineeringwhile financial engineering uses stochastics simulations and analytics to design and implement new financial processes to solve problems in finance the field also creates new strategies that companies can take advantage of to maximize corporate profits for example financial engineering has led to the explosion of derivative trading in the financial markets since the cboe options exchange was formed in 1973 and two of the first financial engineers fischer black and myron scholes published their option pricing model trading in options and other derivatives has grown dramatically 12through the regular options strategy where one can either buy a call or put depending on whether they are bullish or bearish financial engineering has created new strategies within the options spectrum providing more possibilities to hedge or make profits examples of options strategies born out of financial engineering efforts include married put protective collar long straddle short strangles butterfly spreads etc the field of financial engineering has also introduced speculative vehicles in the markets for example instruments such as the credit default swap cds were initially created in the late 90s to provide insurance against defaults on bond payments such as municipal bonds however these derivative products drew the attention of investment banks and speculators who realized they could make money from the monthly premium payments associated with a cds by betting with them in effect the seller or issuer of a cds usually a bank would receive monthly premium payments from the buyers of the swap the value of a cds is based on the survival of a company the swap buyers are betting on the company going bankrupt and the sellers are insuring the buyers against any negative event as long as the company remains in good financial standing the issuing bank will keep getting paid monthly if the company goes under the cds buyers will cash in on the credit event criticism of financial engineeringalthough financial engineering has revolutionized the financial markets it played a role in the 2008 financial crisis as the number of defaults on subprime mortgage payments increased more credit events were triggered credit default swap cds issuers that is banks could not make the payments on these swaps since the defaults were happening almost at the same time many corporate buyers that had taken out cdss on mortgage backed securities mbs that they were heavily invested in soon realized that the cdss they held were worthless to reflect the loss of value they reduced the value of assets on their balance sheets which led to more failures on a corporate level and a subsequent economic recession due to the 2008 global recession brought on by engineered structured products financial engineering is considered to be a controversial field however it is apparent that this quantitative study has greatly improved the financial markets and processes by introducing innovation rigor and efficiency to the markets and industry 