Alexei A.Gaivoronski January 2006 TIØ4137 Financial Optimization 1 Financial Optimization and Risk Management Professor Alexei A. Gaivoronski Department of Industrial Economics and Technology Management Norwegian University of Science and Technology

Alexei A.Gaivoronski January 2006 TIØ4137 Financial Optimization 2 Topics of the course Optimization and Risk Management in Financial Engineering –Equities –Fixed income –Risk measures and VaR –ALM and other practical models Risk management in industry –Telecom –Energy

Alexei A.Gaivoronski January 2006 TIØ4137 Financial Optimization 3 Role of optimization in financial engineering Financial engineering – the blend of theoretical finance with computer modeling to support financial decision making Financial engineers use the techniques of modern finance to design new securities, synthesize investor portfolios and build financial structure of institutions Financial engineers use optimization models to achieve their design goals along the competing dimensions of risk and reward taking into account regulatory requirement, institutional policies and investor needs

Alexei A.Gaivoronski January 2006 TIØ4137 Financial Optimization 4 Optimal decision making under uncertainty Dynamic nature of decisions, hence uncertainty Random variables: asset returns, values of liabilities, timing of events Discrete random variables: take finite number of values with given probabilities, these values are called scenarios Optimization under uncertainty is an important element of enterprise-wide risk management