• C++ Programming for Financial Engineering
    Highly recommended by thousands of MFE students. Covers essential C++ topics with applications to financial engineering. Learn more Join!
    Python for Finance with Intro to Data Science
    Gain practical understanding of Python to read, understand, and write professional Python code for your first day on the job. Learn more Join!
    An Intuition-Based Options Primer for FE
    Ideal for entry level positions interviews and graduate studies, specializing in options trading arbitrage and options valuation models. Learn more Join!

The State of Financial Engineering

Somehow I missed this post, until now.

I think that Prof. Raynes criticism of the obsession with Black-Scholes and options pricing is spot on. But its ironic to note that his view of finance is equally narrow. When he says "finance" what he means is "structured products". These are frequently complex structures to hold debt and spread risk. Raynes gives this away when he talks about "deals". These deals are the design and construction of a structured product, which requires large teams of people (including lawyers to make sure that no one will go to jail). The other edge he deals with is the analysis and pricing of structured products that already exists (e.g., is a mortgage pool properly priced).

Looking at Raynes books on Amazon I kept thinking of those masters of structured products and the special purpose entities that hold them: Enron.

The creation and analysis of structured products dwarfs the complexity of options. I'm also sure that these entities will not go away, even after Enron and the later 2008 crash. There is a huge amount of money to be made with these things and the masters of structured product creation are all doubtlessly rich.

It would be interesting to know what correlation exists between the complex analysis that Reynes proposes and the eventual value of the structured product being analyzed.