<p>Think in the broader sense of engineering as a way of assembling various building blocks in order to create something else. In this case, the building blocks are financial instruments (stocks, bonds) and their related derivative securities (options, swaps). What you are trying to create is a particular payoff profile, out of instruments that have different payoff profiles.</p>
<p>A direct investment in a stock has a simple straight-line payoff profile. As the value of the stock goes up, the value of your holding goes up directly, in the same proportion.</p>
<p>Options are different. Depending on the instrument, the value of your holding may go up as the stock rises (or falls, or both…), and then stay constant above (or below) a certain value of the underlying stock.</p>
<p>By combining options and investments in the underlying stock one can tailor portfolio payoff profiles to meet desired objectives.</p>
<p>This is perhaps the most central aspect of financial enginering.</p>
<p>A question an investment firm frequently may need to ask is “how much should we pay for this weird investment opportunity we’re being asked to bid on?”. The investment opportunity can be valued in part by developing a portfolio of readily-priced securities and options that match its payoff profile.</p>
<p>This field is highly mathematical. So is conventional engineering, in college, but in practice most engineers do not heavily use all the math they learned. In financial engineering you do. The math underlying options valuation is similar to that of heat transfer in mechanical engineering; complex partial differential equations.</p>
<p>The people I’ve known who are doing this kind of work at the highest levels are really really smart. Many are physics PhDs who had to do something else to eat when they couldn’t get steady work in physics.</p>
<p>The tie-in with OR in Princeton’s program is appropriate. Statistics and simulation are very important in this field.</p>
<p>I would think that most people wouldn’t really know as an entering undergraduate that they want to pursue this challenging but very specialized field. There are grad programs in financial engineering that make more sense to me. Some good programs are at : Carnegie Mellon, U Wisconsin, BU I think. The U Chicago MBA program can also go in a pretty quantitative direction I believe.</p>