IE444 Operations Research in Finance 2005

Instructor: M. C. Pinar
Room: 305
Office Hours:  Monday 15:30-17:00, Wednesday 14:30-17:00
Textbook and Reference Material:
          General information

The course aims to familiarize students with basic operations research tools used in modern finance. The emphasis is on optimization models. The student intending to take the course should have a background in optimization at the level of IE303 and in engineering economics concepts. There will be homework assignments requiring use of XPRESS-MP optimization package.


          1. Cash flow streams,  present value, fixed-income instruments
          2. Linear programming models in finance: cash flow matching and dedication: sections 2.1 and 2.2 of Nielsen's notes.
          3. Fundamental theorem of asset pricing (chapter 2 of Zhang)
          4. Risk-neutral pricing and arbitrage detection in single period models, pricing options (chapter 4 of Zhang)
          5. Arbitrage in multiperiod investments: stochastic linear programming and binomial trees (based on a paper by A.J.King)
          6. Introduction to quadratic programming
          7. Mean-Variance Markowitz portfolio optimization (based on notes by Zhang, and a review paper by M. Steinbach)
          8. Multiperiod and other extensions of Markowitz portfolio optimization (based on M. Steinbach)
          9. Integer programming in finance: constructing an index fund (from G. Cornuéjols' notes)
         10. Risk measures in finance and their minimization: VaR and CVaR (based on Cornuéjols and Tűtűncű)
         11. Credit risky bonds and optimization (based on the paper by Bertsimas and Pachamanova)
         12. Robust portfolio selection (based on the paper by Bertsimas and Sim, and section 4 of the paper by Ben-Tal and Nemirovski)