What is the role of financial engineering on Wall Street?
Financial engineering refers to the application of mathematical and quantitative methods to financial problems. On Wall Street, financial engineering plays a crucial role in the creation and trading of complex financial instruments.
One of the main purposes of financial engineering is to manage risk. By using mathematical models, financial engineers can create financial instruments that allow investors to hedge against risk or to take on risk for potential gains. Some common examples of financial instruments that result from financial engineering include derivatives, such as options and futures contracts.
Another role of financial engineering is to create innovative investment products that cater to the needs of specific investors. For example, a pension fund might have specific requirements for its investments, such as a need for regular income streams. Financial engineers can create customized investment products that meet these specific needs.
Financial engineering has come under criticism in the past for contributing to the 2008 financial crisis, with some arguing that complex financial instruments created through financial engineering led to a lack of transparency and accountability. However, proponents argue that financial engineering has played a vital role in the development of the financial markets and in the growth of the global economy.
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