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Educational Committee: Frequently Asked Questions
Please browse through the below frequently asked questions – and their answers – about educational programs in financial engineering. This document, which is a work in progress, was developed by the IAFE´s Education Committee to supply students with an introduction to the field.
In addition, we also encourage prospective students, educators and employers to look at the results of our most recent Financial Mathematics Student Survey. In the fall of 2002, the IAFE and the Mathematics in Finance Program at New York University hosted the second annual National Financial Mathematics Career Fair held in downtown Manhattan. Close to two-hundred students from twenty mathematical Finance programs came to the fair venue to meet with fourteen companies including Salomon Smith Barney, Bear Stearns, Citigroup and JP Morgan Chase. We asked all participants to fill in a small survey to help educators understand better the views of a broad cross-section of students engaged in financial mathematics. To see the results of the survey, click here. Throughout the FAQ below, relevant excerpts from the survey are used to illustrate certain points.
Frequently Asked Questions
What is financial engineering?
Financial engineering refers to the application of various mathematical, statistical and computational techniques to solve practical problems in finance. Such problems include the valuation of derivatives instruments such as options, futures and swaps, the trading of securities, risk management and regulation of financial markets.
No single set of mathematical tools, computational techniques or financial theory describes financial engineering. Rather, it is the synthesis of a variety of these elements. Financial engineering is a practical field and a practitioners’ field by its nature. It is driven in large part by practical problems that arise in the course of daily business; the nature of the problems demand that practitioners draw from as broad a palate of tools as possible to find the best solutions to their problems.
A second, related definition is that financial engineering is the use of financial instruments such as forwards, futures, swaps, options, and related products to restructure or rearrange cash flows in order to achieve particular financial goals, particularly the management of financial risk.
There are many names I have heard besides financial engineering, such as financial mathematics, mathematical finance and computational finance. What differences, if any, are there between these names?
The differences in names are mainly cosmetic, reflecting to a large degree differences in the organizations sponsoring the names. The name financial mathematics is relatively new and seems to have arisen from mathematics departments that have sponsored programs in areas relating to financial engineering. The name financial engineering is older – for example, the IAFE was founded in 1992. In this FAQ we will use the names financial engineering, financial mathematics and mathematical finance synonymously.
The 2002 Survey put forth the question “What is the name you prefer for the field?” with choices including financial engineering, financial mathematics and mathematical finance; 48% of students stated a preference for financial Engineering, while together financial mathematics and mathematical finance garnered 35% of the votes.
What is the benefit of pursuing a degree in financial mathematics?
There are a variety of masters programs in financial mathematics at pioneering institutions such as the University of Chicago, New York University, Columbia University and Carnegie Mellon. The programs teach the key mathematical, statistical and computational methods of financial engineering along with financial theory and practical courses about financial markets and financial instruments. These programs are relatively new, but have been successful in placing students in a variety of positions – including trading, risk management, portfolio management and quantitative analyst positions – at top tier financial institutions around the world.
A typical financial mathematics program will offer courses in pure and applied mathematics including areas from partial differential equations, probability theory including stochastic processes and stochastic differential equations, computational techniques including scientific computing and advanced computational methods for finance and a series of courses in financial theory and its applications including derivatives pricing, capital asset pricing and risk management. Each program will differ in terms of how courses are taught, who teaches the courses and what topics are emphasized. Because financial mathematics programs are increasingly recognized as giving students a broad background in the types of skills necessary for doing financial engineering on the job, students from these programs are increasingly sought after.
Is there a standard financial engineering curriculum for masters programs?
Presently there are no national or international standards for what topics should appear in a financial engineering program.
What degree programs are available?
There are dozens of financial mathematics masters degree programs around the world. The majority of these programs are in the United States, but there are programs in Canada, the United Kingdom and continental Europe as well. Masters programs usually run from one to two years in length with the major differences between programs being the curriculum’s distribution between mathematical, statistical and computational techniques, and financial theory and its applications. This is further reflected in the choice of faculty, and in particular the balance between tenured professors and practitioners.
In addition to masters programs in financial mathematics, some universities offer Ph.D.’s in the subject area financial mathematics. Though we do not know of any official Ph.D. in financial mathematics, we know there are increasing numbers of students who receive Ph.D.’s from mathematics departments in which the topics studied, and the problems solved, derive from financial engineering.
Students interested in pursuing a masters or Ph.D. in financial mathematics should consult the IAFE’s index of academic programs. Educators who are interested in starting a financial mathematics program should feel free to contact the IAFE directly for advice and information.
There are a number of institutions offering mathematical finance and financial engineering programs. Does the IAFE recommend specific programs or maintain rankings? Also, how do I decide which program is best for me?
The IAFE does not recommend rankings, but it does maintain a list of institutions offering such programs. Moreover, we know of no officially published ranking of mathematical finance programs presently available.
While the factors you should use to evaluate a mathematical finance program will naturally depend on your background and future plans in the financial engineering world, here are a few things to consider:
* Curriculum: does the curriculum offer a broad selection of topics in mathematics, computing and finance that will form a solid foundation for career in financial engineering?
* Practical versus theoretical training: does the curriculum offer the right blend of exposure to theoretical concepts and practitioner-based "real world" ideas?
* Faculty: what is the quality of the faculty and what is the level of contact between the faculty and the community of practitioners of financial mathematics/financial engineering?
* Resources and facilities: what sorts of resources does the program have (e.g. financial data, software, computer labs, trading labs, etc)?
* Placement: what is the placement record of the program and, more specifically, what sorts of jobs do graduates of the program get upon graduation and what sorts of jobs do former graduates hold today?
The IAFE Education Committee recommends that students who are serious about investigating their options take the time to talk to faculty at various programs about these questions and request to be put in touch with alumni of the programs to get their perspectives as well.
What sorts of careers do financial engineers pursue?
Financial engineers use the skills they acquire during their degree programs toward a broad selection of careers in finance, including the trading of securities, financial modeling, sales, risk management and portfolio management. We believe that the skill sets acquired in a financial mathematics masters program are sufficiently broad to prepare students for many interesting fields. Moreover as it is increasingly recognized in financial firms that computational and mathematical skills are critical to the success of all organizations, the market for students with financial mathematics degrees continues to broaden.
In the 2002 Survey, 38% of students stated that they want a career in some sort of job related to derivatives pricing, while 21% said risk management and 18% said trading derivative instruments (14% of students did not respond).
What sorts of majors do undergraduates who pursue degrees in financial mathematics masters programs have?
Students in financial mathematics masters programs have degrees in a variety of different majors, but a majority have degrees in pure and applied mathematics and engineering. Other majors with significant representation include computer sciences, physics, engineering, economics and a variety of liberal arts majors. Despite the concentration in mathematics and engineering, the important common factor among students is a foundational level of training in mathematics and computer programming and a strong interest in finance and financial markets.
In the 2002 Survey, students were asked what best described their undergraduate major; 34% of the students responded with Engineering and 24% with mathematics or Applied mathematics. 9% responded with Humanities.
If I do not have a math or engineering degree what are my chances of being accepted to a financial mathematics program?
Your chances will mainly be determined by your overall background, not your major. A strong history major with appropriate course work (see below) in mathematics and an appropriate level of computer skills can be admitted to a financial mathematics program. While a majority of students in financial mathematics programs do have math and engineering degrees, students from all majors with the appropriate mathematical and computer science background are encouraged to apply. The main factor for success is the level of mathematical background and talent, the experience in computing, and an interest in finance.
What coursework is appropriate to be accepted to a mathematical finance program?
Standards vary from program to program. However, there seems to be a broad consensus that without course work in calculus, advanced calculus (including Taylor series), linear algebra and probability theory a student will find most financial mathematics programs difficult. Similarly, students with no experience programming computers in languages like C, C++, PERL or Java will also find such programs difficult. We do encourage students to take this as a general guideline and to contact specific programs for more details.
Should I take time off and work before going to a financial mathematics program or should I go straight from college?
So much of a job search comes down to individual factors, that it is hard to make generalizations. That said, our experience is that students who go straight from undergraduate to masters programs usually compete with other masters students as well as undergraduates for jobs. However, some employers will prefer students with a four-year degree plus specific training in financial mathematics. Others will simply seek out the strongest students from the increased pool. We have found that masters students with no job experience compete favorably with undergraduates. In addition, we have found that students who returned to a masters program after work experience of one to five years do quite well in there job searches too.
Answers from the 2002 Survey state that at least 27% of currently enrolled mathematical finance Students came straight from college, while 26% of currently enrolled mathematical finance Students had been out of college for five or more years (10% of students did not respond).
Note: The above frequently asked questions document is a work in progress, developed by the IAFE Education Committee to supply interested readers – prospective students, educators and employers – with basic information about educational programs in financial mathematics. We encourage all readers of this section to send suggestions and comments to education@iafe.org |
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