How to prepare for financial engineering programs - Part 2

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How to Prepare for Financial Engineering

Programs Part 2
By Joy Pathak - Updated October 2nd, 2010

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This is Part 2 of my popular post, How to Prepare for Financial Engineering Programs. I finished all
my refreshers in the Baruch MFE program at the end of August but I have been very busy with the
classes to actually finish this article. This post will include topics, books, information I learnt/used in the
refreshers and suggestions on how someone can cover these topics by themselves. I will break the
topics according to the four refreshers I went through. For obvious reason I will not go into the excessive

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details of what was taught in the refreshers, but I will touch upon the general topics one should cover
before starting a financial engineering program. In this post I give very specific topics and books one
should go through before entering a MFE program. This post is not as general as the one before. Do
remember that the Baruch College refreshers are notorious for being very rigorous. There is more
material covered in four weeks than would be in a whole semester.

1. PROGRAMMING
Since programming was my first refresher and the building block for most of the other courses I figured I
would talk about it first. I would definitely recommend to everyone who is entering the world of financial
engineering to build up on their C++. C++ is the most widely used programming language in
Quantitative finance. To prepare for C++ as I mentioned before I went through a list of the books I
outlined in my previous post. In the C++ refresher as I mentioned in another post (Exponential
Learning Part 1), I used the Walter Savitch book How to Problem Solve in C++. Some of the topics
that one has to be very familiar with before entering a financial engineering program are the following
(no order).

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Ex 3, Section 1.5

1.
2.
3.
4.
5.

Parsing CSV files and manipulating the data to calculate various measures/ratios.
Utilizing Boost libraries
Using Classes effectively
Using the Standard Template Library
Understanding of functions, Inheritance, Polymorphism.

These are the topics that I believe are important for someone who will be entering a financial
engineering program, especially Baruch. Going through the ENTIRE Savitch book will give anyone a
strong base in C++ and then you can utilise the knowledge learnt in the numerical analysis sense in the
program. The rest you will be taught in your respective programs hopefully. If you are not taught C++ in
your MFE program, I would re-think joining that program if it was me as it is crucial to success in this
industry. There are parts of Quantitative finance where other languages are used but it is a fact that
C++ is widely used.
I basically went through the Savitch book and solved a range of problems from behind the book. We
were given in our refresher course two major projects to do at the end of the course where-in we
utilised a range of tools we learnt to full-fill the requirements of the project.
Book I used for C++:
Problem Solving with C++, 7th Edition by Walter Savitch

2. MATHEMATICS FOR FINANCIAL ENGINEERING

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Students' intro thread

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How to prepare for financial engineering programs - Part 2

I am going to break this part into two. The first part with deal with the mathematics one should have a
good grasp on before entering the program which is directly used in quantitative finance. The first part
will focus more on the advanced calculus topics whereas the second will focus on the Algebra topics.
a) Mathematical Finance/Advanced Calculus
Mathematical finance for this post means primarily advanced calculus concepts with application to
finance. In our class we utilised, A Primer for the Mathematics of Financial Engineering as our main
book for the course. This book is definitely a MUST HAVE for every financial engineering student. Some
of the concepts that a student must ABSOLUTELY know before entering an MFE program should be:
1. General Differentiation, Integration(definite & indefinite)
2. Numerical Integration techniques like Simpsons method.
3. Taylor Series and approximations
4. Finite Difference methods (forward, backward, central finite)
5. Multivariable Calculus (chain rule, integration by parts, minimum/maximum)
6. Lagrange Multipliers
Most of these topics have strong financial applications as can be seen in the Primer book. The book
goes through all the applications from bond price calculations to Black Scholes call/put pricing, implied
volatility, bootstrapping to find yield curves, etc. A complete review of this book by me can be found
here
Book I used for Mathematical Finance:
A Primer in the Mathematics of Financial Engineering Dan Stefanica

b) Advanced Algebra
Algebra is a vast field. The applications from Algebra to Finance are very specific. A good MFE program
will go through all of these in extreme detail. There is a significant amount of Numerical Linear Algebra
that is used in quantitative finance and should be taught in every program. Since at Baruch we have a
whole course devoted to Numerical Linear Algebra I decided to just make sure I know the basic
concepts very well and made sure I understood some of the common algorithms used in detail. Some of
the topics that one should definitely know before entering an MFE program should be as follows:
1. Matrix Addition,Multiplication,etc
2. Eigen values, Eigenvectors
3. Applications to Complete Markets
4. Algorithms to solve N dimensional linear equations (basics)
5. Algorithms to find eigenvalues and eigenvectors.
6. LU decomposition, Gaussian elimination
These are some of the topics that should be an absolute must before entering an MFE program in terms
of algebra. The rest/advanced topics should or probably will be taught in the program.
Books I used to study Algebra:
Introduction to Linear Algebra Gilbert Strang
Lecture Notes provided by Dr. Dan Stefanica

3. PROBABILITY/STATISTICS

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How to prepare for financial engineering programs - Part 2

a) Statistics
This part is up for debate. Having a strong background in statistics is definitely important considering the
amount of time series analysis that is conducted in quantitative finance. Having a good background in
statistics definitely aided me in the Statistical Arbitrage class. It also helped me secure my job as
Quantitative Strategist building and testing statistical arbitrage strategies for AQC. The benefits of
having a strong statistics background can aide considerably depending on which field of finance one
wants to enter. A strong econometrics course or advanced statistics course should help here. I
conducted a lot of self study in econometrics and published a paper in the field too utilising significant
amounts of factor modelling before entering the program.
Books I used to prepare for Statistics:
Mathematical Statistics with Applications (used it in my class in Spring 2010 @ University of
Windsor)
Stat-Arb Primer made by myself and Dr. Jim Liew for Statistical Arbitrage class (This has not
been published yet. It is in the works but will be used in future classes)

b) Probability
This mostly refers to probability theory, a precursor to Stochastic Processes and Stochastic Calculus. I
utilised two books to study for this part. Both were also recommended in our refresher seminars. I learnt
majority of the concepts in a more applied sense before coming to the refreshers, whereas majority of
the items taught in the course were quite theoretical. Some of the topics that one should be very familiar
with before entering the program should be:
1.
2.
3.
4.

Probability Measure (basics)

Conditional Probabilities
Independence
Expectation, Variance

5. Joint Distribution, Conditional Distributions, Marginal Distributions

6. Everything in Discrete time and continuous time
7. Law of large numbers and Central Limit theorem
These topics are almost always covered in any undergraduate course so one should already be familiar
with all these concepts. It is up for debate if a strong understanding of the proofs and theoretical
information associated with probability is required. We go through a rigorous proof based probability
refresher at Baruch. This is primarily to aide us in the Probability and Stochastic Processes course in
the fall semester which is quite proof based. The Stochastic Processes course is the pre-requisite for
the Stochastic Calculus course that will be taught in Spring 2011.
Books I used to prepare for Probability:
Lecture Notes by Dr. Elena Kosygina
A natural introduction to probability theory Ronald Meester
First course in Probability- Sheldon Ross

4. FINANCE
The reason I put finance at the end is because, most of finance can be picked up relatively easily in
comparison to the mathematics part. Get a strong understanding of the programming and mathematics
part and the basic finance knowledge can be easily gained from CFA level 1 , any introductory

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How to prepare for financial engineering programs - Part 2

undergraduate finance course or book.

If you want to get a deeper understanding of finance in relation to particularly financial engineering, then
the Hull book is a necessity. I personally used the new Hull book for all my finance preparation. The
Primer for the Mathematics of Financial engineering by Dan Stefanica is also a good aide when it
comes to the finance part considering there are many introductions to finance given, in the
mathematical setting.
Books I used to prepare for Finance:
Options, Futures and Other Derivatives John Hull
A Primer for Mathematics of Financial Engineering

All in all, I believe I am very confident with what I know in terms of being ready for the program. I will
make another post that will be part 2 of the Exponential Learning which will involve what I learnt in the
last two refreshers and their review.
My first class was on Thursday for Probability and Stochastic Processes for Finance. I have Numerical
Methods in Finance next, and then Object Oriented Programming in Finance after that. I will also be
taking the Pricing of Financial Instruments course with Bob Spruill this fall semester. I wish there was
some way of me overloading and taking Commodities Trading with Luis Molina (MD @ Credit Suisse
Commodities Division) or Volatility Surface with Dr. Jim Gatheral, but I suppose that will have to wait for
now.
Hope this helps! Feel free to post questions in the comments section. I will try my best to answer them
all.
Tags: financial engineering study, Joy Pathak, mfe, MFE requirement, MFE study plan
Related posts:
1.
2.
3.
4.
5.

How to prepare for Financial Engineering programs Part 1

Exponential Learning Part 1 What One Can Learn in Two Weeks
Review: A Primer for the Mathematics of Financial Engineering
To Oil or Not to Oil: Part One
The Hollow Men of Financial Engineering

13 Comments
Thank you Joy!! Your posts about the preparation needed for an MFE are always very
helpful!!
Looking forward to the next one
Federico Maffioletti, 10.03.2010 [07:06 am]
Suggestions from Joy would probably have much more weight than mine, but Id like to
add my 2 cents regarding good book on some of above topics:
As for C++, back then when I was learning the language, the C++ Primer book by Stan Lippman
served me very well. On the other side, for someone knowledgeable in C++, Id certainly suggest
reading Stroustrups The C++ Programming Language for the refresher.
As for probability and statistics, I found DeGroot/Schervish Probability and Statistics (became
aware of this book as it was used as textbook for MIT 18.05 course) very good its somewhat
dry, and pretty much on the formal mathematical side, but the amount of information packed in is
awesome.
Cgorac, 10.04.2010 [07:02 pm]
I was wondering which one is a better book for preparation:
1)A Primer for the Mathematics of Financial Engineering
2)Principles of financial engineering
I am considering buying one of them to prepare for my future MFE program but I am wondering

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How to prepare for financial engineering programs - Part 2

which one should I purchase or maybe will it be even more beneficial if I buy both.
davix, 10.11.2010 [01:13 am]
Hello Davix,
I would suggest buying the Primer. The Principles of Financial Engineering book is an
advanced book. You are better of buying Nefctis Mathematics of Finance related book first and
then Principles. I personally would suggest the Primer at this time, and once you have a strong
understanding of that book you can jump onto more advanced books as the Principles of FE and
Math Fin book by Nefcti.
Joy Pathak, 10.12.2010 [01:01 pm]
davidx,
I think you would get a better reply if you provided some detail about your background and
which schools you were looking to get into.
For example, some schools care more about your finance background, other your mathematical
background and the rest would like to a healthy combination of the two.
In general, the programs run by Math departments dont care very much about your Finance
background (they assume you can learn this on the job), the programs run out of
Business/Finance departments care very much about your financial background while the ones
that empathize finding their graduates a job care about the mix
HM, 10.13.2010 [05:02 am]
Joy, why did you choose MFE over CQF?
stat arb, 10.30.2010 [04:16 am]
Your writing style is poor and the content of your post highlight your superficial
understanding of the topics that youre constantly giving advice on.
You write:
Get a strong understanding of the programming and mathematics part and the basic finance
knowledge can be easily gained from CFA level 1 , any introductory undergraduate finance
course or book.
What does that mean?
First off, I could let your poor writing slide but what I cant let slide that you are writing pure
nonsense. You seem to be trying to say one can pick up basic financial knowledge by STUDYING
and passing the level 1 of CFA exam. This is like saying you can easily pickup the basics of
finance by studying the basics of finance gee thats helpful advice.
And secondly passing the CFA level I exam would require a lot of time (about 250 hours) and
there is a lot material in the CFA that is just NOT relevant to financial engineering like ETHICS
and Corporate Governance to mention just two.
And you also wrote:
If you want to get a deeper understanding of finance in relation to particularly financial
engineering, then the Hull book is a necessity. I personally used the new Hull book for all my
finance preparation.
But you are you showing a picture of an old edition of the Hull book not the NEW Hull Book.
Also it is poor writing to write I personally The word I pretty much implies personally. You
are just using superfluous words to mask weak content.
And you then wrote:
The Primer for the Mathematics of Financial engineering by Dan Stefanica is also a good aide
when it comes to the finance part considering there are many introductions to finance given, in
the mathematical setting.

Books I used to prepare for Finance:

Options, Futures and Other Derivatives John Hull
A Primer for Mathematics of Financial Engineering
Please how many times are you going to shamelessly plug Dans book? This book plugging just
reduces your creditability (even more) as a writer!
Here is another paragraph of yours that needs help:
All in all, I believe I am very confident with what I know in terms of being ready for the program. I
will make another post that will be part 2 of the Exponential Learning which will involve what I
learnt in the last two refreshers and their review.
I will re-write it for you:
All in all, I am very confident that I now have the knowledge to successfully complete the program.
Then you need to start a new paragraph because your next thought has nothing to do with your
last sentence:
I will make another post that will be part 2 of the Exponential Learning which will involve what I

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How to prepare for financial engineering programs - Part 2

learnt in the last two refreshers and their review.

And also rewrite that sentence to something like this:
I will post part 2 of the Exponential Learning which will cover what I learned from the last two
refreshers and their reviews.
Note: The word Learnt is not a word in American English.
Let me help your writing some more, you wrote:
My first class was on Thursday for Probability and Stochastic Processes for Finance. I have
Numerical Methods in Finance next, and then Object Oriented Programming in Finance after that.
I will also be taking the Pricing of Financial Instruments course with Bob Spruill this fall semester.
I wish there was some way of me overloading and taking Commodities Trading with Luis Molina
(MD @ Credit Suisse Commodities Division) or Volatility Surface with Dr. Jim Gatheral, but I
suppose that will have to wait for now.
My first class, Probability and Stochastic Processes for Finance, was on Thursday. Next I had
Numerical Methods in Finance, followed by Object Oriented Programming in Finance. I will also
be taking the Pricing of Financial Instruments course with Bob Spruill this fall semester. I wish that
I could overload the Commodities Trading course with Luis Molina (MD @ Credit Suisse
Commodities Division) or the Volatility Surface course with Dr. Jim Gatheral, but I suppose those
courses will have to wait for now.
I hope that my comments inspire you take some writing courses before you make any more
poorly written posts. So even though you dont have a clue about what you writing about a least
you will write it well!
AmericanMade, 12.17.2010 [05:48 am]
This is a blog post, not a literary piece. It is supposed to be in a conversation format. But I
do appreciate you taking the time to read and comment.
Here is a piece of my writing that is NOT a blog post. If you would really like to help my writing,
please find flaws and let me know about it. http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?
per_id=1414122
Joy Pathak, 12.17.2010 [09:00 pm]
Are there many people in your program who knew nothing about finance when they
applied? I am such a situation (PhD in physics from a top school). Ive started reading
some books and have found the material fascinating. I already have much programming
knowledge and dont find the stuff too difficult but are concerned about convincing the admissions
committee of my interest.
mojomojo, 01.23.2011 [07:18 pm]
Gosh, you sound pretty angry. I am sure Joy means no harm in giving this advise. Im sure
he implied that since Financial Engineering encompasses programming, Finance and
Mathematics, by studying such a complicated subject, it would be relatively easier to pick up
Finance.
r...., 01.29.2011 [04:28 am]
I wanted a Masters degree. I dont think the CQF would get me far at this time.
Joy Pathak, 01.29.2011 [05:21 am]
Hi, could you tell me some advice in preparing for PhD in Financial Engineering (I hope I
will get at least one offer)? I have good background in Math & Computer Science, none
related to Finance/Economics, very little in Statistics. Any advice would be appreciated. Thanks!
Evan Manuel, 02.16.2011 [06:13 am]
What do People think of NYU poly for financial engineering?
Musanj, 06.17.2011 [08:56 am]

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