# The State of Financial Engineering

#### Sylvain Raynes

We are the CDO makers,
and we are the dreamers of dreams.
Betting on lone loss triggers,
for whom the pale bonus gleams.
Yet we are the sole underwriters,
of the deals, forever it seems!
Fantasia on a Theme by William Blake​
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All over the world, it has become fashionable for Universities and Colleges to offer Masters degree programs in quantitative finance or financial engineering (FE), a code word meaning the solution of the Black-Scholes option pricing differential equation in as many ways as possible. To do so, students are taught to use basic techniques in numerical analysis whenever the equation is either non-linear or does not lend itself to the standard analytical solution. As a precursor to this main task, the program usually includes a course in stochastic calculus during which Ito's celebrated lemma is discussed, proved and used.

In general, the cost and length of such programs are remarkably similar despite the variability in the quality of the teachers and the brand name of the institution. In many cases the FE program is one of the biggest money makers at the University, if not the biggest, enabling schools to charge somewhere between $25,000 and$35,000 for eighteen months of night classes taught by top professionals in the field. Many such people are in fact refugees from bulge-bracket Wall Street firms looking for something to do before heading out to pasture in Florida and Arizona. In addition to being crassly commercial in their approach to knowledge transfer, often resorting to advertising their own former firm in the classroom, they are willing to accept much less in compensation than full-time professors and never become management headaches to the institution. Even Ivy League schools like Princeton University, who swore up and down they would never play this game, are now happily teaching finance and deriving significant incremental income from a fully depreciated curriculum.

#### Daniel Duffy

##### C++ author, trainer
Throughout our Internet search, the following topics were absent from the syllabi of the numerical analysis courses within the financial engineering curricula of the academic institutions we reviewed

Did you look at commercial offerings ?, e.g. mine

[...] the elements of numerical analysis are not addressed, perhaps because this would take up too much time and force the school to hire teachers who would demand higher pay and thus decrease yields.

There are a number of issues; indeed, where will you find a PhD in numerical analysis who also knows finance and the fact that numerical analysis demand pre-requisite knowledge of real analysis, linear algebra and some more.

#### Shantanu Kumar

1. Excellent numerical analysis skills
http://www.amazon.com/Numerical-Methods-Dover-Books-Mathematics/dp/0486428079/

[..] and supplement that with an advanced math or computational finance course in "Coursera".

How's the feedback on these courses?
It varies. But the course on Numerical Analysis from UW didn't receive good feedback. On the other hand there are courses like Machine Learning, Algorithms, Probabilistic Graphical Model etc which have received good feedback. I can only say for the courses which I have followed. I suppose in general courses at Coursera have received good responses.

#### Thembile

Check out MIT's Robert Pindyck's approach on the subject to see just how profound the insight from FE can be in capital investment and capital budgeting, risk and uncertainty, market dynamic modelling like entry-exit, capacity expansion, etc. from the Real Options perspective. Also, check out NCSU's Paul Fackler's approach on the subject and you will quickly realize that FE has brought level of sophistication to investment strategy and natural resource management that would never be there today. Both these guys use the option pricing methodology as well as dynamic programming in their solution of real options valuation problems. Robert Pindyck's approach on selecting investment projects dwarfs the NPV rule of regular finance in many ways and any MBA would do good to read his papers. I however I agree with the author of this article that a more solid grounding in Numerical Analysis (with reasonable programming implementation), Real Analysis, Linear Algebra, Differential Equations (ODE, PDE, BV/IVP) is necessary for greater understanding and use of finance concepts.

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