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What is financial engineering? and how they relate to the current financial crisis experienced by the world?

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Question added by Mansour Mansour , Chief accountant , Al-Ayuni for investment and Construction / KSA
Date Posted: 2013/06/22
Frank Avitia
by Frank Avitia , Managing Director , AIS Investment Services

Financial engineering is a multidisciplinary field involving financial theory, the methods of engineering, the tools of mathematics and the practice of programming.
It has also been defined as the application of technical methods, especially from mathematical finance and computational finance, in the practice of finance.
The best known critic of financial engineering is Nassim Taleb, a professor of financial engineering at Polytechnic Institute of New York University who argues that it replaces common sense and leads to disaster.
Many other authors have identified specific problems in financial engineering that caused catastrophes: Aaron Brown named confusion between quants and regulators over the meaning of “capital”, Felix Salmon fingered the Gaussian copula function, cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected.
The cracks became full-fledged canyons in2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.
Ian Stewart criticized the Black-Scholes formula, the equation itself wasn't the real problem.
It was useful, it was precise, and its limitations were clearly stated.
It provided an industry-standard method to assess the likely value of a financial derivative.
So derivatives could be traded before they matured.
The formula was fine if you used it sensibly and abandoned it when market conditions weren't appropriate.
The trouble was its potential for abuse.
It allowed derivatives to become commodities that could be traded in their own right.
Pablo Triana dislikes Value-at-Risk Scott Patterson accused quantitative traders and later high-frequency traders.
A gentler criticism came from Emanuel Derman who heads a financial engineering degree program at Columbia University.
He blames over-reliance on models for financial problems

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