1- COMPUTATIONAL FINANCE ( FINANCIAL ENGINEERING )
Computational finance or financial engineering is a cross-disciplinary field which relies on computational intelligence, mathematical finance, numerical methods and computer simulations to make trading, hedging and investment decisions, as well as facilitating the risk management of those decisions. Utilising various methods, practitioners of computational finance aim to precisely determine the financial risk that certain financial instruments create.
Generally, individuals who fill positions in computational finance are known as “quants”, referring to the quantitative skills necessary to perform the job. Specifically, knowledge of the C++ programming language, as well as of the mathematical subfields of: stochastic calculus, multivariate calculus, linear algebra, differential equations, probability theory and statistical inference are often entry level requisites for such a position. C++ has become the dominant language for two main reasons: the computationally intensive nature of many algorithms, and the focus on libraries rather than applications.
Computational finance was traditionally populated by Ph.Ds in finance, physics and mathematics who moved into the field from more pure, academic backgrounds (either directly from graduate school, or after teaching or research). However, as the actual use of computers has become essential to rapidly carrying out computational finance decisions, a background in computer programming has become useful, and hence many computer programmers enter the field either from Ph.D. programs or from other fields of software engineering. In recent years, advanced computational methods, such as neural network and evolutionary computation have opened new doors in computational finance. Practitioners of computational finance have come from the fields of signal processing and computational fluid dynamics and artificial intelligence.
Masters level degree holders are also increasingly making their presence felt as more terminal programs become available at the leading schools. Today, all full service institutional finance firms employ computational finance professionals in their banking and finance operations (as opposed to being ancillary information technology specialists), while there are many other boutique firms ranging from 20 or fewer employees to several thousand that specialize in quantitative trading alone. JPMorgan Chase & Co. was one of the first firms to create a large derivatives business and employ computational finance (including through the formation of RiskMetrics), while D. E. Shaw & Co. is probably the oldest and largest quant fund (Citadel Investment Group is a major rival).
Financial Engineering is a multidisciplinary field involving financial theory, the methods of engineering, the tools of mathematics and the practice of programming. The Financial Engineering Program at Columbia University provides a one-year full-time training in the application of engineering methodologies and quantitative methods to finance. It is designed for students who wish to obtain positions in the securities, banking, and financial management and consulting industries, or as quantitative analysts in corporate treasury and finance departments of general manufacturing and service firms.
The first half of our program is devoted to the tools of the trade and their use in modeling financial markets and instruments. Students take courses in stochastic processes, optimization, numerical techniques, Monte Carlo simulation, and data analysis. They also study portfolio theory, derivatives valuation, and financial risk analysis, making use of the methods they have learned.
The second half of the program gives students the opportunity to take more advanced courses or study specialized topics. We offer a selection of more detailed courses on current subjects of interest, ranging from models of the term structure of interest rates to a study of the implied volatility smile, as well as a course on applications programming for financial engineering. Students can also choose from a variety of courses on particular markets and their models, for example mortgage-backed securities or credit-risk modeling.
In addition to courses within the engineering school, students can also take electives from various schools within the university, such as the Graduate School of Business, the Graduate School of Arts and Sciences, the School of Law, and the School of International and Public Affairs.
Our program also hosts a popular Financial Engineering Practitioners Seminar on Monday nights, at which Wall Street and industry practitioners present seminars on their recent research or particular specialty, and where students can hear firsthand about life in the financial world.
2- VALUE ENGINEERING
Value engineering (VE) is a systematic method to improve the "value" of goods or products and services by using an examination of function. Value, as defined, is the ratio of function to cost. Value can therefore be increased by either improving the function or reducing the cost. It is a primary tenet of value engineering that basic functions be preserved and not be reduced as a consequence of pursuing value improvements.
In the United States, value engineering is specifically spelled out in Public Law 104-106, which states “Each executive agency shall establish and maintain cost-effective value engineering procedures and processes."
Value engineering is sometimes taught within the project management or industrial engineering body of knowledge as a technique in which the value of a system’s outputs is optimized by crafting a mix of performance (function) and costs. In most cases this practice identifies and removes unnecessary expenditures, thereby increasing the value for the manufacturer and/or their customers.
VE follows a structured thought process that is based exclusively on "function", i.e. what something "does" not what it is. For example a screw driver that is being used to stir a can of paint has a "function" of mixing the contents of a paint can and not the original connotation of securing a screw into a screw-hole. In value engineering "functions" are always described in a two word abridgment of an active verb and measurable noun (what is being done - the verb - and what it is being done to - the noun) and to do so in the most non-prescriptive way possible. In the screw driver and can of paint example, the most basic function would be "blend liquid" which is less prescriptive than "stir paint" which can be seen to limit the action (by stirring) and to limit the application (only considers paint.) This is the basis of what value engineering refers to as "function analysis".
Value engineering uses rational logic (a unique "how" - "why" questioning technique) and the analysis of function to identify relationships that increase value. It is considered a quantitative method similar to the scientific method, which focuses on hypothesis-conclusion approaches to test relationships, and operations research, which uses model building to identify predictive relationships.
Value engineering is also referred to as "value management" or "value methodology" (VM), and "value analysis" (VA). VE is above all a structured problem solving process based on function analysis—understanding something with such clarity that it can be described in two words, the active verb and measurable noun abridgement. For example, the function of a pencil is to "make marks". This then facilitates considering what else can make marks. From a spray can, lipstick, a diamond on glass to a stick in the sand, one can then clearly decide upon which alternative solution is most appropriate.
Background
Value Engineering (VE) was developed at General Electric Corp. during World War II and is widely used in industry and government, particularly in areas such as defense, transportation, construction, and healthcare. VE is defined as "an analysis of the functions of a program, project, system, product, item of equipment, building, facility, service, or supply of an executive agency, performed by qualified agency or contractor personnel, directed at improving performance, reliability, quality, safety, and life cycle costs."
The OFPP Act requires every Federal agency to maintain a Value Engineering program. DOD has had an active VE program since at least the early 1960s.
Despite its close tie-in with other DOD priorities such as Reducing Total Ownership Costs (R-TOC) and despite ample evidence that VE is highly cost-effective, the use of this program by the Services and defense agencies has diminished in recent years. Responsibility for VE was recently transferred to AT&L/Defense Systems and a series of meetings have been held with government and industry to consider ways to revive this program.
Value Engineering Change Proposals (VECPs)
The purpose of the Value Engineering Change Proposal (VECP) Program is to incentivize the contractor to propose contract modifications which reduce cost without reducing product or process performance. Two aspects of the VECP make it unique in achieving its purpose: the requirement that the VECP result in a contract modification, and the incentive paid to the contractor for reducing costs. The VECP is the formal document a Contractor uses to submit a cost saving recommendation to the government in accordance with the VE provisions of their contract. A VECP must be submitted under an existing contract and must result in a change to that contract. In addition, the change must result in a reduction in the system's life cycle cost to the Government
For over three decades the VECP has had a notable history as an effective savings program for the Government. Countless programs have used the VECP to reduce cost and improve both product and process. Contractors have used the VECP to increase their profits and to ensure continuing improvement to their products. Most authorities concede that Value Engineering is an excellent program but that its use has waned in recent years due to a perceived lack of support by government agencies. Providing this seed money would encourage agencies to establish VE, promote wider acceptance, and provide criteria for a sound program.
Traditionally, VECPs have been used most often on procurement contracts. More recently, the lower number of new acquisition systems and lower production quantities have heightened the attention paid to the sustainment of existing systems. Approximately 60 percent of the funds in the DOD's Total Obligation Authority (TOA) are in Operations and Support (O&S). Replacement systems are not being developed as often as in the past, resulting in an increase in the number of Service Life Extension Programs. Contractor Logistics Support (CLS) is being used more frequently to maintain existing systems. Manpower reductions are increasing the value of improvements in reliability and maintenance and reductions in supply requirements. Use of open system architectures is facilitating system upgrades and insertion of new technologies. The government is encouraging the contractor to develop and use commercial technologies in defense systems. Mechanisms are being sought to incorporate improved technologies into existing systems to increase system readiness, extend service life, reduce the O&S cost burden and ensure existing systems can continue to meet developing threats. This heightened interest in the sustainment of existing systems offers an increased opportunity for use of the VECP.
In today's environment, the VECP has a vital role as one of the proven tools for reducing program cost and improving product and process performance. As one element in a more comprehensive cost reduction program, the VECP can provide for system enhancements and cost reduction changes which might not otherwise become available to the Government. The VECP can be used at any point during acquisition but the predominant application has been and continues to be in the production and support phase of a program. On these legacy systems, the VECP remains one of the principal, established and proven tools for reducing cost and enhancing system performance.
3- COST ENGINEERING
Cost engineering is an area of engineering practice concerned with the "application of scientific principles and techniques to problems of cost estimating, cost control, business planning and management science, profitability analysis, project management, and planning and scheduling.
Key objectives of cost engineering are to arrive at accurate cost estimates and to avoid cost overruns. The broad array of cost engineering topics represent the intersection of the fields of project management, business management, and engineering. Most people have a limited view of what engineering encompasses. The most obvious perception is that engineering addresses technical issues such as the physical design of a structure or system. However, beyond the physical manifestation of a design of a structure or system (for example, a building), there are other dimensions to consider such as the money, time, and other resources that were invested in the creation of the building. Cost engineers refer to these investments collectively as "costs".
Cost engineering then can be considered an adjunct of traditional engineering. It recognizes and focuses on the relationships between the physical and cost dimensions of whatever is being "engineered". Cost engineering is most often taught at universities as part of construction engineering, engineering management, and related curricula because it is most often practiced on engineering and construction capital projects. Engineering economics is a core skill and knowledge area of cost engineering.
Cost engineering is a field of engineering practice that began in the 1950s (AACE International was founded in 1956). The skills and knowledge areas of Cost Engineers are similar to those of Quantity Surveyors. AACE International is one of many international engineering organizations representing practitioners in these fields.
In 2006, AACE published the Total Cost Management (TCM) Framework which outlines an integrated process for applying the skills and knowledge of cost engineering (see References). This has also been called the world's first process for portfolio, program and project management.
BOOKS ON FINANCIAL ENGINEERING
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