financial engineering
Structured finance design
Financial engineering is the application of mathematical and computational methods to financial problems—designing new financial instruments, managing risk, or structuring complex transactions.
The field draws on statistics, economics, and computer science.
Financial engineers create derivatives, develop trading algorithms, and build models for pricing securities.
The term sometimes carries negative connotations, suggesting clever manipulation rather than genuine innovation: The collapse was caused by financial engineering that obscured the underlying risks.
Bundling debts into investable instruments
- credit enhancementMethod to reduce investment risk
- collateralizationPledging assets as security
- waterfall structureBuilt or natural water drop
- subordinationLower position in hierarchy
Noncommittal maneuvering
- credit riskPotential for borrower nonpayment
- market riskExposure to price fluctuations
- systemic riskEconomy-wide collapse potential
- exposureState of being unprotected
stress testing · tail risk · Greeks · drawdown · credit default swap · risk premium
Available courses of action
Borrowing cheaply to invest higher
- arbitrageurTrader exploiting price discrepancies
- mispricingIncorrect cost assignment
Finite problem-solving procedure
- optimizationMaximizing efficiency or performance
- backtestingValidating strategies using history
- calibrationAdjusting for measurement accuracy
- regressionReturn to former state
copula · quant · machine learning · signal processing · data mining
Time-adjusted revenue valuation
- net present valueDiscounted sum of cash flows
- fair valueReasonable exchange price
- present valueCurrent equivalent of future sum
- yield curveRates plotted against maturities
securitization
Bundling debts into investable instruments
- credit enhancementMethod to reduce investment risk
- collateralizationPledging assets as security
- waterfall structureBuilt or natural water drop
subordination · pass-through · tax optimization · conduit · pooling
hedging
Noncommittal maneuvering
- credit riskPotential for borrower nonpayment
- market riskExposure to price fluctuations
- systemic riskEconomy-wide collapse potential
exposure · stress testing · tail risk · Greeks · drawdown · credit default swap · risk premium
options
Available courses of action
carry trade
Borrowing cheaply to invest higher
- arbitrageurTrader exploiting price discrepancies
- mispricingIncorrect cost assignment
algorithm
Finite problem-solving procedure
- optimizationMaximizing efficiency or performance
- backtestingValidating strategies using history
- calibrationAdjusting for measurement accuracy
regression · copula · quant · machine learning · signal processing · data mining
discounted cash flow
Time-adjusted revenue valuation
- net present valueDiscounted sum of cash flows
- fair valueReasonable exchange price
- present valueCurrent equivalent of future sum
- financebank, CFO, banks, controller, treasurer
financial engineeringcommunity banking
Regional financial institutions serving locals
financial engineeringmanufacturing
Industrial product creation
value investing · sweat equity · industrial production · value creation · Main Street
financial, finance, finances, financed, financing, financier, financiers, financially, engineer