Civil engineering and financial engineering
Taken from Harvard Business Review – Article Archive
Mohammad Hadi Mosati
Big structure and Financial Earthquake
Civil engineering creates a structure using the science of properties of materials and objects, mathematics and design. A structure like a big bridge that connects the two sides of a wide river.
Financial engineering is a skill whose foundation is based on applying the principles of economics in financial management and designing financial solutions and contracts.
The reason for applying engineering to this skill is that it takes advantage of the properties of financial statements and financial and accounting-oriented information, the use of financial mathematics and the design of new tools in the construction of various financing and investment models.
Passing over the structure
The users of the structure created by civil engineering are cars and people who cross the bridge. The users of the structure created by financial engineering are investors and holders of funds and money who use tools designed to preserve the value of money and increase the profitability of the resources employed.
From bridge design to financial security system design
Both categories of users above have common demands. Both structural engineers have a common checklist for structural testing.
The structure of this checklist is questions of a physical and budgetary nature.
See a combination of the engineers’ checklist and the users’ requests for a deeper understanding:
Civil Engineer:
Can the bridge bear the weight of 50 tractors or giant trucks at once?
Is the bridge resistant to heavy winds and storms?
Will the bridge remain after an earthquake of the century (the largest earthquake that can occur in a hundred years)?
How much does it cost to build such a bridge?
Financial Engineer:
Is the financial structure resistant to the sudden fall of the stock market? (Keeping returns even when the market falls)
Will the financial structure remain after an earthquake of the century (a sharp increase in default risk) in the financial markets?
Will the financial structure be resistant to changes in tax laws and accounting standards?
What is the cost of the financial structure?
Now we understand the common goal of structural design engineers:
Finding the best solution among conflicting constraints with the tendency to reduce risk
This post is written by MalekAhm