The Difference between quantitative finance and financial engineering?
Some terms in trading sometimes sound the same. There are a lot of job roles in finance. Let us discuss some of them.
The term financial engineering is related to the application of mathematical techniques to solve financial problems. Financial Engineering is a profession where engineers create products to help a given company, and quantitative finance is a profession where experts use math and statistics to measure risk or invest money for a fund.
The difference between these two names gives us some idea about what we should be looking for, but there is a lot more for us to think about whenever we look at these words.
Developing applications with Mathematical theory that is related to Measure theory, Applied Walks, Continuous Stochastic Processes, Ito Calculus, Stochastic Differential Equations, Martingales, more akin to the Sciences, such as Physics, Mathematics (a more rigorous level of Mathematics) are all seen as Mathematical Finance.
Main facts about Financial engineering:
- Financial engineering involves option pricing, Secularization, Products of Structured Finance, and it is not as rigorous as Mathematical Finance and is more focused on a specific problem of financing the complex structure.
- Financial engineering involves the practice of programming, economic theory, tools of mathematics, and methods of engineering:
- Persons have seen technical methods, more computational finance, and mathematical finance in the financing practice.
- Even though several financial engineers have studied engineering before and some Universities offer postgraduate degrees in this field, they have requested that applicants have an engineering background, even though financial engineering does not fit in with traditional professional engineering.
- In America, the Accreditation Board for Engineering and Technology (ABET) offers no accreditation for financial engineering degrees.
- The International Association of Quantitative Finance provides certification for the financial accreditation program.
- Tools from applied mathematics, statistics, and economic theory, computer science are used in Financial engineering.
- Persons who use technical tools in finance, such as computer programmers in banks or statisticians who work in the government economic bureau, are seen as financial engineers.
- Even though many practitioners restrict the term to persons who are educated in the full range of modern finance tools, their work has to be informed by financial theory.
- Persons have even applied more restrictions and only consider those who originate new financial strategies and products.
- Financial engineering is significant for persons who are involved in customer-driven derivative businesses.
- Finance engineering includes programming and quantitative modeling, risk managing derivative products, and trading to comply with regulations and Basel Capital/liquidity requirements.
Quantitative analyst or Quant covers all persons who work with math for practical purposes, such as financial engineers. Quants usually specialize in specific areas such as risk management, derivative structuring or pricing, algorithmic trading, and investment management.
The first-generation Financial quants to arrive on Wall Street in the late 1970s to early 1980s adapted the names Rocket Scientists or aerospace engineers an older term which was first used when rockets were developed in Werner Van Braun or WWII and more recently, the NASA space program.
Disruptive innovation which includes fondness and adventurousness is synonymous with financial engineers.
There were Financial ’Rocket scientists“ trained in statistics or finance, applied mathematics, they spent their whole careers doing risk-taking. They applied mathematical techniques to financial jobs or worked for themselves because they were not hired for their mathematical abilities.
However, more recently the financial engineers of this generation are equipped with their PhDs in physics and mathematics and they start their careers in non-financial fields of academics.
Quantitative finance or Mathematical finance is applied mathematics in one place if you are only interested in the mathematical modeling of financial markets overall. Mathematical finance will change and widen the numerical or mathematical models without connecting with financial theory, observed market prices will be taken as input. Mathematical consistency is needed, not like economic theory, therefore a financial economist may study the structural reasons behind the share price of a certain company, while a financial mathematician would settle for the price they are given without checking anything, or they would use stochastic calculus to find the equal value of derivatives of the stock (see: Financial modeling; Asset Pricing; Valuation of options). In mathematical finance, the fundamental theorem of arbitrage-free pricing is a key theorem. However, the Black-Scholes formula and equation are found in the key results.
In the early 1990s, the first-degree programs were set up for Financial Engineering, but over the years the number of programs has increased very fast. Persons now refer to those who have a degree in the field as ’financial engineers“.
The Difference between quantitative finance and financial engineering is that experts in quantitative finance or Quants deal with one special niche in finance and Financial Engineers are practitioners with broad expertise.
The difference between financial analysis and financial engineering is that financial analysts (specific tasks) evaluate projects, businesses, and budgets and financial engineers (broad tasks) are practitioners with broad expertise that work with insurance companies, asset management firms, hedge funds, and banks.
The term ’aggressive restructuring of corporate balance sheets“ is sometimes seen as a disparaging term; persons use it when they are speaking out against persons who they think are profiting from paper games that will cost employees and investors as well. However, the term financial engineering is more widely used in recent times.
The fields of computational finance and financial engineering have been overlapped heavily by Mathematical finance. Financial engineering focuses on modeling and application, stochastic asset models often assist here. While Mathematical finance focuses on building tools of implementation for the models generally and analysis. Advanced quantitative techniques are required for both branches of finance: derivatives pricing on one side and risk- and portfolio management on the other side.
Louis Bachelier a French mathematician is seen as the author of the first scholarly work on mathematical finance, Mathematical finance became a discipline in the 1970s even though the work was published in 1900. It followed the work of Robert Merton, Fischer Black, and Myron Robert on option pricing theory.
Many degrees and research programs are being offered today for Mathematical financing.