Financial Engineering


DEFINITION of 'Financial Engineering'

The use of mathematical techniques to solve financial problems. Financial engineering uses tools and knowledge from the fields of computer science, statistics, economics and applied mathematics to address current financial issues as well as to 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.

BREAKING DOWN 'Financial Engineering'

Financial engineering has led to the explosion of derivative trading that we see today. Since the Chicago Board 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.

  1. Derivative

    A security with a price that is dependent upon or derived from ...
  2. Security

    A financial instrument that represents an ownership position ...
  3. Hybrid Security

    A security that combines two or more different financial instruments. ...
  4. Futures Contract

    A contractual agreement, generally made on the trading floor ...
  5. International Association Of Financial ...

    A not-for-profit, professional society dedicated to promoting ...
  6. Automated Bond System - ABS

    The electronic system on the NYSE that records bids and offers ...
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  1. What is continuously compounding interest?

    An interest contract with continuously compounding interest is designed to maximize the total possible interest accumulation ... Read Full Answer >>
  2. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  3. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  4. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  5. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>
  6. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>

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