Finance and engineering are two seemingly unrelated fields to most people. Yet financial engineering is one of the hottest business careers. Financial engineering is multidisciplinary niche where mathematical formulas are used to create sophisticated models of financial market trends. Financial engineers, or quants, use quantitative analysis to determine the potential risk associated with a monetary investment. Similar to engineers, quants apply computational mathematics to design innovative, profitable financial products. It’s their mission to implement new instruments and processes that resolve finance problems and improve performance metrics.Fischer Black and Myron Scholes created their pioneering formula in the 1970s. Today, financial engineering has exploded into corporate finance and investment banking. Financial engineers are highly skilled practitioners who apply theoretical knowledge to develop data-based products and maximize market conditions.
Salary
National salary data from PayScale shows that the median annual salary for financial engineers in the United States is $88,995. This is equivalent to a mean hourly wage of $42.79, or $7,416 each month. Financial engineers generally receive bonuses ranging from $2,035 to $23,000 annually with profit sharing around $10,000. Total average annual compensation for financial engineers is $113,995.
Beginning Salary
When just jumping into financial engineering, quants can expect to land in the bottom 10th percentile with yearly income around $53,587. However, experienced financial engineers with senior responsibilities bring home an average base salary of $140,103. It’s not uncommon for large investing firms and hedge funds to dole out $250,000+ annual salaries.
Key Responsibilities
As the “rocket scientists of Wall Street,” financial engineers are primarily responsible for the creation of financial products using complex statistical calculations. They acquire vast amounts of market data and conduct quantitative analysis to design effective trading or pricing models. Financial engineers need to create reasonably accurate simulations of market behavior to form desirable investment. In-depth financial knowledge allows quants to judge the amount of risk placed with:
- investments
- securities
- assets
- other products
Other job duties could include:
- generating data algorithms
- determining product directions
- creating volatility models
- comparing trading venues
- using software like KDB/Q to explain data
Necessary Skills
Financial engineers are intelligent, inquisitive, and creative math gurus. They have the analytical and critical thinking skills to scrutinize big numbers. It’s essential to have the mathematical skills to apply:
- linear algebra
- statistics
- stochastic calculus
- other methods into finance
Being successful will require articulate communication and public speaking skills to effectively present thoughts clearly. Writing abilities with proper grammar are also important for financial engineers to create flawless reports. Programming skills like Java, C++, and Python are extremely favorable when designing financial platforms, especially mobile computing. Financial engineers need top-notch problem-solving skills to determine the right switches to improve performance of financial products.
Degree and Education Requirements
Becoming a financial engineer will require finishing a four-year Bachelor of Science at minimum. Most aspiring quants major in:
- finance
- economics
- statistics
- mathematics
- computer science
- engineering
Degrees must be from accredited colleges. Today’s employers prefer hiring financial engineers holding a graduate degree though. It makes sense to earn a:
- Master of Science in Finance (MSF)
- Master of Financial Engineering (MFE)
- or Master of Science in Financial Mathematics
Some MBA programs will also have computational finance or quantitative analysis specializations. Picking an academic degree approved by the International Association for Quantitative Finance (IAQF) is suggested. Financial engineers usually don’t earn PhDs because the industry collectively feels the doctoral degree is disadvantageous.
Pros and Cons of the Position
Anyone landing a job in financial engineering can thank their lucky stars because competition is fierce. However, the position will have benefits and drawbacks. On the plus side, financial engineers make above-average salaries with lucrative bonuses and investment plans. Math geniuses enjoy applying formulas to discover new ways of analyzing market data. It’s rewarding to be able to educate investors on better approaches in:
- buying
- selling
- trading
Financial engineers are more than just suits who crunch numbers. They’re scientists who leave a lasting impact on the success of financial products.
On the flip side, working in financial engineering isn’t for the meek and anxious. Stress is high. There’s little job stability because funds can plummet and bad investment performance can get quants fired. Managing large sums of green may be overwhelming for many. Financial engineers also must invest heavily in their own post-secondary education and certification.
Getting Started
From your freshman year, you’ll need to begin shaping your financial engineering career. It’s essential to apply for internships, part-time work, and co-operatives in financial institutions. Getting to know the trading and investment atmosphere is crucial. Interns often rotate around departments for a good picture of what’s involved in financial engineering. If possible, ask professors about consulting projects where you can actually work in quantitative analysis. During your graduate studies, consider joining the IAQF for journal access and networking events. Forming lasting connections in the financial field can help land that coveted interview. Some aspiring quants complete the Chartered Financial Analyst (CFA) program by passing the rigorous, three-step testing process. There’s also the Certificate in Investment Performance Management (CIPM) credential. The FINRA offers a Chartered Financial Engineer (ChFE) designation to candidates with 10+ years of experience.
Future Outlook
Financial engineering is a young, emerging profession with rapid growth. Financial institutions are hunting for high-level math analysts comfortable with using statistics and quantitative analysis to solve economic problems. According to the Occupational Information Network, financial engineering has a sunny outlook with faster-than-average employment growth by 14 percent through 2024. About 32,300 new jobs can be expected during this timeframe. Nonetheless, keep in mind that entry-level financial engineering positions on Wall Street are extremely tough to crack. Foreign students migrating to the U.S. with hardcore quantitative backgrounds are the biggest competition. Many financial grads are drawn to the field’s high salaries and bonuses. Financial engineers can find openings in:
- investment banks
- hedge funds
- consulting firms
- corporations
- government agencies
- regulatory agencies
- brokerages
Conclusion
Overall, financial engineers are skilled mathematics who use statistical theories and engineering principles to tackle tough financial issues. They deal with:
- decision models
- capital markets
- derivative pricing
- trading
- econometrics
Financial engineers play pivotal roles in forming innovative tools to minimize uncertainty and risk in today’s turbulent market. Pursuing the financial engineer career path can also lead to prestigious roles like:
- quantitative developer
- algorithmic trader
- portfolio manager
- hedge fund manager.
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