Posted 10 March 2011
Discovering the Challenges of Financial Engineering
Teri L. Geske, lecturer and executive-in-residence teri.geske@anderson.ucla.eduUCLA Anderson School's Master of Financial Engineering Program - www.anderson.ucla.edu/mfe
In an episode of The Discovery Channel’s series, “Extreme Engineering”, a computer simulation was used to model the impact of a Category 10 typhoon on a planned suspension bridge (part of the Hong Kong airport project constructed in the 1990s). As shown in the simulation, these extreme conditions would cause the bridge as designed to sway, bow and twist dramatically, an unacceptable risk. Engineers had to find a way to prevent this from happening or the bridge could not be built and the viability of the airport project would be jeopardized. A solution was eventually found, through a combination of mathematics and engineering know-how, along with a good measure of creativity, exactly the type of challenge that someone who pursues a career in engineering hopes to encounter. But projects like the Hong Kong airport come along once in a lifetime, if that. Where can people with an aptitude for mathematics and analytical problem-solving skills, and a keen desire to do something meaningful with those abilities, find satisfying work that does not require a combination of extraordinary circumstances and good timing? One possible answer might surprise you: Finance.
Financial engineering, also referred to as “quantitative finance” is a branch of engineering that is too often overlooked by those with degrees in engineering, math and physics when considering career alternatives. It has much in common with other branches of engineering and physics where mathematical and analytical challenges are encountered regularly. Financial engineering deals with concepts routinely learned in engineering, physics and mathematics programs, such stochastic variables, Brownian motion and diffusion processes, and data with non-stationery characteristics. Like other branches of engineering, it involves designing, building, testing, modifying and implementing models; these models attempt to capture the real world of financial markets. The world of buying, selling, managing and evaluating the risks of stocks, bonds, currencies, commodities, and derivatives thereof offers an unending list of challenges to be addressed, because conditions are always changing, and extreme events happen far more frequently than a bell-shaped curve would suggest. In other words, the work of a financial engineer is rarely, if ever, routine.
So, how does one become a financial engineer (or “quant” as these professionals are nick-named in the industry)? How does one break into this field? It may surprise you to learn that most of the pioneers, the trailblazers, the “founding fathers” of financial engineering, studied math or physics before turning to the challenges of finance. Fisher Black, co-author of the famous “Black-Merton-Scholes” option pricing model (which, not coincidentally, employs the heat transfer partial differential equation), studied Applied Mathematics at Harvard, Nobel laureate Robert Merton studied engineering, math and economics at Columbia, Cal Tech and M.I.T., Benoit Mandlebrot and Stephen Ross studied physics at Cal Tech, and the list goes on.
So, up until about ten years ago, when major banks on Wall Street or investment management firms needed to hire people with strong quantitative modeling skills they would look for people with an advanced degree in physics, mathematics or engineering. Often, people with those backgrounds had worked for a couple of years in a research laboratory or for a big engineering or telecommunications firm and were looking for a more energetic environment in which to employ their skills, so it was a good match (and still is). One shortcoming of this approach is that there is rarely any formal on-the-job training, so much independent study is required of a newcomer with no formal background in finance. In a fast-paced setting with real business pressures it can take two to three years before someone in that situation understands enough about financial engineering to be comfortable in the role.
Responding to the growing need in the financial industry for people with strong quantitative skills, a small but growing number of universities now offer a Master of Financial Engineering (MFE, also called Masters in Computational Finance or Master of Science in Computational Finance) degree, designed to provide graduates with a focused combination of applied quantitative modeling skills and financial market knowledge. The best such programs draw upon faculty expertise in financial economics and connections to the financial industry, as well as quantitative modeling know-how. Employers have become familiar with the MFE degree and actively recruit graduates of these programs for positions in modeling complex securities, evaluating trading strategies, developing hedging techniques and risk management programs, and designing quantitative investment strategies in the hedge fund and traditional asset management arenas.
So, you may now be thinking that a career in financial engineering sounds exciting and challenging. But wait, weren’t these “quants” the people who caused, or at least greatly contributed to the financial crisis that crippled economies in the U.S. and most of the developed countries around the world? Weren’t they suppose to forecast and manage risks, but instead created problems with their complex models? In fact, didn’t their models simply fail? Without going into the actual causes of the Great Collapse (which would require another lengthy article), no, financial engineering is not to blame, just as we cannot blame the engineers who design a bridge to withstand Category 10 typhoons if the bridge, while being simultaneously hit by a typhoon, a magnitude 8.5 earthquake and a tsunami, buckles and cracks. Nonetheless, the lessons learned from the Crisis are an opportunity for financial engineers to roll up their sleeves, study the new data and build better models to incorporate greater stresses. For those with quantitative skills and a desire to do interesting, challenging work, it is an exciting time to become a financial engineer.
Additional reading about engineers, mathematicians and physicists on Wall Street: “How I Became a Quant – Insights from 25 of Wall Street’s Elite” – Lindsey & Schacter, ed. “My Life as a Quant – Reflections on Physics and Finance” – Emanuel Derman Posted 10 January 2011
Heavy Lift with Off-the-Shelf Parts
Bob Morstadt, Brigham City, UT
A heavy lift vehicle could be built relatively cheaply with off-the-shelf parts. A modification of the Space Shuttle to carry cargo, which was called Shuttle-C in the past, can lift over 100,000 pounds to LEO. This is about the weight of one solid propellant Castor 120 motor (similar to the first stage of the Peace Keeper missile). About three Castor 120 motors is equivalent to the total impulse of the Saturn V third stage. Thus, three shuttle launches would be equivalent to one Saturn V vehicle, but this means that the Saturn V vehicle or something comparable does not need to built from scratch. The Castor 120's motor would be placed in LEO and strapped together in modular fashion to make a vehicle to go to the moon, asteroids, Mars, etc. Solid propellant motors do not have the issue of large evaporation losses like cryogenic liquid propellants. Large scale nuclear thermal propulsion currently does not exist and it might very well be dependent on cryogenic liquids like liquid hydrogen when it arrives. The transferring of liquid hydrogen by tanker-type rockets again raises the issue of large evaporation losses. The VASIMIR propulsion has the same issue if liquid hydrogen is used and may very well require a nuclear power source. Large nuclear propulsion systems will face public safety issues when they arrive. They are hardly off-the-shelf items. Posted 9 September 2010
Colony Goal Needed
Jim Martin
Recent discussions have focused on near-term targets for human exploration. The discussions should start with a long-term goal.
An important long-term goal for exploration is creation of a self-sufficient colony off of Earth. Once that goal is achieved, space exploration will continue much as exploration of America continued after colonies were established.
With such a long-term goal, picking the right directions in the near term will have more meaning. Important questions will need to be answered, such as what gravity level is needed, how large a colony needs to be, and where it could be. Locating a colony on the moon or Mars would have some advantages, but we do not know if people can live in such low gravity levels. Locating a colony in space, such as at a libration point, would allow rotation to provide as much gravity as needed.
An important part of the exploration is the effect it has on the general public. Recent space efforts have not excited much interest. With a colony goal and some near-term efforts to answer the needed questions, more people will be excited.
Posted 10 August 2010
What Needs to be Done?
Bill Ketchum
There are currently many issues being debated in America and the world: the economy, the war on terrorism, nuclear proliferation, immigration, the space program, and others.In only one of these issues could I be considered anywhere close to being an “expert.” That is the space program, in which i have participated as an engineer for my entire adult life, since I was 21 years old in 1957, when the space race started with Sputnik.
There is much debate as to what needs to be done for America to maintain its leadership in space as it is winding down its use of the space shuttle and abandoning its plan to return to the moon. Some feel that a mission needs to be committed to first (a problem looking for a solution), such as human exploration beyond the moon (Mars, asteroids, etc), or space tourism (a hotel in Earth orbit or on the moon), or efficient, non-polluting energy generation (solar power satellites), etc. Others feel that new rockets with increased capabilities should be developed first (a solution looking for a problem), such as a heavy lift vehicle for cargo, and a reusable spaceplane for passengers. There are no end of suggestions for either of these approaches now being hotly debated within the space community. And then there is the issue of politics, and lobbyists pushing for maintaining their interests.
It will not be sorted out easily or soon. But like the other issues facing America, it must be addressed if America is to maintain its leadership. First and most of all, all of us in the space community should stop squabbling amongst ourselves, and come together to provide a unified plan for the nation to consider and adopt in moving forward into the future. This we can and will do.
Posted 10 August 2010
What Needs to be Done? (Discussion continued....)
Bob Eidson
I Must reiterate my firm opinion that any proposal for a new Manned Space Mission MUST be in support of a well defined National Commitment to a Plan spanning one or more decades! History teaches us that development and deployment of new Systems with no Clear and Committed Mission will inevitably never come to fruition! How many of you recall the programs, such as, Advanced Launch System and Space Tug, which GD pursued for years only to see them vanish into nothingness?Our Nation seems to have developed and become locked into a near term vision of Manned Space Exploration which has been, and may likely continue to be, stuck in Low Earth Orbit without a real and sustainable Plan for the future!!
Posted 10 August 2010
What Needs to be Done? (Discussion continued....)
Bruce Cordell
These same issues came up in Freeman Dyson’s talk at ISDC 2010 recently. What we should do is keep working and be patient. But we won’t have to wait much longer…! Here’s my take on it: Big Apollo-style programs (e.g., the Panama Canal) come in cycles. To develop political support for them requires many people in society to feel like they’re “getting ahead”, and that requires a Kennedy-style economic boom which “lifts all boats.”
I first experimented with some of these ideas in Space Policy in 1996 but didn’t really get interested in it until, of all things, NATO had an international conference in Portugal in 2005 on how long-term economic trends might be influencing warfare and global security. In my talks to all kinds of audiences over the last several years, my experience is that if you can actually personally remember the 1960s it will make more sense than if you’re an 18-year-old university student who doubts the significance of anything that happened more than 10 years ago! Posted 10 August 2010
What Needs to be Done? (Discussion continued....)
Tom Kessler
Boy, I love that optimism about the economy, if for no other reason than it would also lead to an improvement in my 401K(!). I hope you are right. I think the major potential flaw in your argument - at least as it relates to the United States and NASA, is that it implicitly just looks at our country in isolation from others and from other fundamentally different geo-political circumstances - such as the national debt, the ossification of the western economies under socialist rule, and (ironically enough) the growth of China under more laissez-faire capitalism. Speaking pessimistically, I would say that we might see this new era in space exploration - but we won't be leading it, the Chinese will.My optimistic side says that we have just about reached the end of the grand socialist, national government-led space program and are seeing the beginnings of a truly sustainable privately-led public space program.
My view of history is that very few major advancements/explorations were sustainably led by governments. Usually, government did the first few things (Columbus, Lewis and Clark, the early Army Air Force, etc.) and then private industry took over. Space will be no different, it just took longer. In any of our past grand frontier advancements, there was always a "there" there. In other words, there was always riches to be discovered "there" and therefore there was a strong desire for people to go "there". Government has to set up some initial conditions - like finding the New World, or navigable rivers to the west coast, or the development of lightweight aircraft structures and propulsion. But, after that, private industry takes over.
The problem for space has been that there is not anything worthwhile that can be tapped economically compared to other solutions on the ground. Say what you want about zero-g manufacturing, or space tourism, they just have not been economically valid until the likes of Scaled Composits, SpaceX and Bigelow. Once they establish viable businesses, they and others will spawn other businesses in other places and eventually the surfaces of other planets. I can see the changes already. We are now actively engaged in at least 3 major commercial initiatives in the space area - which would be unheard of just 5 years ago. We are getting leaner and meaner, and, frankly, more commercial. Here I will put in a plug for all you gentlemen because many of you helped usher in the beginning of this age with the commercial Atlas program. That commitment to build 62 vehicles was exactly the kind of entrepreneurial, commercial-style initiative that we (hopefully) will be seeing more of. Another grand irony is that, of Elon Musk's two major commercial initiatives, Tesla and SpaceX, it is the space initiative that is on the firmer financial and market footing - despite all the hoopla about electric vehicles. Not sure what conclusion you can draw from that, but the facts are clear. So, I think we both see a better world ahead, but perhaps for different reasons!
Posted 10 August 2010
What Needs to be Done? (Discussion continued....)
Michael C. Simon
Bruce, your theories are thought-provoking and could be as plausible explanations as any for why societies undertake large projects. While human achievements do seem to occur in cycles, I would suggest that there are huge, epochal cycles that occur every few hundred or even few thousand years, mini-cycles that occur every 25 years or so, and many mid-intensity cycles in between. Was Apollo part of a 25-year mini-cycle of innovation preceded by the Manhattan Project and followed by the Internet? Or a 50-year cycle preceded by the birth of aviation and before that the transcontinental railroad? Or were Apollo and the Manhattan Project both part of a broader 100-year cycle preceded in the mid-1800s by the transcontinental railroad, metal shipbuilding, discovery of oil, and development of socialist theories; in the mid-1700s by the mass colonization of the New World, birth of the Industrial Revolution, and development of capitalist theories; in the mid-1600s by Newtonian physics, the development of trading companies, and initial exploration of the New World; and in the mid-1500s by the Magna Carta, the Reformation and the beginning of the Renaissance?
If I choose a 50-year cycle, I could argue, like you, that we are about due for the next post-Apollo wave of innovation. But based on a 100-year cycle, we could still be 50+ years away from the next wave. Stepping back and looking at an even bigger picture, maybe progress is really defined by 2,000-year cycles, dating back to the origin of written language 6,000 years ago, then spiking again with the pyramids and development of large building techniques 4,000 years ago, followed by the peak of the Roman Empire and origin of Christianity 2,000 years ago, and then peaking again with current day modern technology, of which we might argue the Space Program has been just one component.
My guess is truly huge things happen in much longer 1,000 or 2,000 year cycles, but interspersed between these monumental peaks are smaller peaks that occur every 500, 100, 50, and 25 years. So we saw a few interesting innovations such as the widespread adoption of personal computers and the Internet 25 years after Apollo, and we are probably on the cusp of some larger 50-year cycle innovations that will characterize the next decade (renewable energy? electric vehicles? a cure for cancer? first private space missions?). 100-year cycle innovations, next due in the middle of this century, could include nuclear fusion, Mars exploration, life extension, etc.). Large scale space development, my initial career inspiration, could be on the 100-year cycle, in which case I might witness its early stages if I live to be 90 or 100, or it could be on a 500, 1,000, or 2,000 year cycle, in which case I will never see it, unless some serious life extension occurs on the 50 or 100-year cycle!
Posted 7 April 2010
Future Generation Jet Propulsion with Gimbal COntrol and Engine Emergency System
Vincent S. Ryan
+91-9600049849
At present, the next generation jet propulsion concept is to reduce the weight by using the composite material and increasing specific fuel consumption, reducing noise, designing efficient engine component (fan blade, compressor, combustor, turbine and nozzle). This will increase the engine efficiency and performance. What if the future engine would have the above mentioned features and additionally multistage combustion chamber, gimbal control thrust and engine emergency system features. The multistage combustion chamber will provide high exhaust velocity, the engine emergency system will provides a compressed air. Generally engine failure leads to an air disaster, like the Hudson River Miracle. So we need a better, efficient and safe engine for the future, which ensures passenger safety when it fails and other systems in the aircraft fail.
Posted 29 March 2010
Aerospace Engineers Make Good Systems Engineers
George Lesieutre
State College, PA
g-lesieutre@psu.eduMuch has been made at recent AIAA meetings about aerospace and defense workforce issues, as well as the particular need for systems and project engineering skills. It surprises some of my colleagues to learn that, of all the engineers who work in the aerospace industry, only perhaps 10-15% of them have degrees in aerospace engineering, as such. The rest have all manner of backgrounds, including mechanical, electrical and civil engineering, as well as computer science and physics. In my experience, this means that many of the people responsible for hiring do not understand what distinguishes aerospace engineering from other related fields. To support a recent review of U.S. doctoral degree programs, the National Research Council used a taxonomy of the field that included the following: aeronautical and space vehicles; systems engineering and multidisciplinary design optimization; aerodynamics; astrodynamics; structures and materials; propulsion and power; navigation, guidance, control and dynamics; and multi-vehicle systems (including ATC). One of the things that distinguishes the undergraduate curriculum in aerospace engineering is a multi-semester capstone design sequence focused on flight vehicles: students learn how the core disciplines interact in the design of feasible, even optimal, vehicle systems. Many companies have a practice of identifying and growing talent internally in the areas of systems and project engineering. Who better to get on this track early than aerospace engineers? They've already learned to to think about systems and have been introduced to some of the design tools -- and many of them have experience with hardware and software systems right out of school, including entries in national competitions like the AIAA Student Design-Build-Fly Competition or the USAF AFRL University Nanosat Program.
Posted 18 March 2010
America’s Lead in Aerospace
Thomas S. Momiyama
U.S. Senior Executive Service (Retired)
Associate Fellow AIAA
What would it take for America to remain the Number 1 aerospace nation? The United States must ultimately survive the 21st century’s precarious world beset with dire economic straits of major nations, consuming “wars” on terrorism, destabilizing nuclear-possession threats of third world countries and widespread destructive regional internecine clashes. This global scene calls for a viable and legitimate military power oversight by responsible nations, especially the de facto lone superpower United States, to hold the fragile peace of the world in balance. And aviation is the central ingredient of that modern military capability, aka “kinetic” power—in the context of “smart” foreign policy.
In the economy-centric “globalization,” nations are setting out each on its own to carve out the most advantageous role possible in this unscripted drama. Foreign sales competitions of proliferating new fighters, as well as airliners, have replaced the classic arms race. The “Made in USA” label is respected but no longer warrants the “monopoly” of American aircraft sales. Not, at the prices of Pentagon’s maligned acquisition process, e.g., of the F-22 and F-35 JSF.
under the surface of this sales competition is a heightened race to excel in the aerospace technology, that is, to spearhead in innovations to make “my” aircraft ever better and, above all, different (a vital term, given that warfare and its needs are continuously and endlessly changing and expanding). Contrary to the prevailing acquisition management mandate, technology innovations precede and anticipate rather than respond to real time operational requirements. Catching up on undeveloped technology during aircraft acquisition is a major cause of cost increase and program delays. In fact, only the new technologies can provide new options for superlative warfare capabilities—UAV/UCAS, for recent example.
Those technology innovations are intrinsic “brain child” of the select scientists and engineers honed in their oft long career of research, concept formulation, design, development and testing of the superlative systems now serving the nation’s frontline warfare and air-transport needs. The (aerospace) industry, with its commercial “mission” to maximize profit, typically shies away from the “high risk, high payoff” investment, the synonym for technology innovation. The nation must thus look to its outright own cadre of innovators in NASA’s and Air Force, Army and Naval Systems Commands’ laboratories, wind tunnels, test facilities and engineering centers.
The funding resources required for technology innovation are surprisingly minimal. They are the S&T (science and technology) front tip of the Defense RDT&E funding, which precedes and technically justifies the usually enormous bulk of the procurement and O&M (operations and maintenance) funding of the defense budget. The military services’ respective S&T specialists partner in programs under NASA’s research funding and Department of Defense’s own DARPA (Defense Advanced Research Program Agency) to make the U.S. technology development a national thrust. The career civil service and military engineers and test pilots are what it takes to keep America in lead in aerospace. The nation would do well to continue reaffirming this special asset.
Posted 8 March 2010
Dale Lawrence Jensen, P.E.
The United States space policy is in disarray because of the President’s decision to cancel the Constellation ( Ares I & IV vehicles) program. The Congress may overrule the President because of the loss of jobs this may cause some of their constituents. However, this decision, to cancel the Constellation program, is the correct one. The purpose of the U.S. space policy should not be to provide jobs, but to pursue a reasonable, rational, and logical course of action which will be a wise and valid expenditure of public funds. I applaud the administration’s decision to cancel the Constellation program. The Constellation program was political patronage to provide jobs for the NASA Johnson Manned Space Flight Center in Houston, Texas. As such, it was a waste of public money. It was a waste of public money, not because of the jobs it created but because it was planned to use a, greatly, inefficient rocket engine, the RS-68. This engine operates at a specific impulse of 410 seconds, compared with the space shuttle rocket engines, which operate at a specific impulse of 454 seconds. The result would be a system similar to the space shuttle, but greatly, more expensive to operate. The U.S. space policy should be to develop advanced-performance rocket engines operating at a much more efficient specific impulse of 470 seconds. These engines would put a greater payload in orbit at lesser cost. That is a valid reason to spend public money, and it will maintain U.S. leadership in space.
Posted 2 March 2010
Identity Withheld
According to Space News, Senator Mikulski recently said that “Chief among the principles I will rely on [in drafting the 2011 funding bill for NASA] is astronaut safety... Safety must be assured by the system NASA chooses.” No one would suggest that anyone, government astronaut of private citizen, should fly on an unsafe vehicle. But what have we come to when assuring astronaut safety is the #1 priority? Would we have broken the sound barrier? Flown the X-15? Put Alan Shepherd in space, John Glenn in orbit or Neil Armstrong and Buzz Aldrin on the moon? John Young and Bob Crippen flew the first Shuttle mission in 1981 without a single test flight to orbit. Perhaps the American public is so convinced that space operations must be “safe” that a politician must take that position, but if NASA believes it we should stop pretending we want a human exploration program. No launch vehicle that has ever carried a human to orbit would be qualified as “safe” under NASA’s draft standards. Does that make sense? A human space program is a careful balance of safety and reward. If assuring safety is the overriding criteria, we’ll never get off the pad.
Have an opinion on a current aerospace issue? Send a note (200 words or less) to elainec@aiaa.org. See it posted here, and join the discussion!
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