Optimization models play an increasingly important role in ﬁnancial de-cisions. Many computational ﬁnance problems ranging from asset allocationto risk management, from option pricing to model calibration can be solvedeﬃciently using modern optimization techniques. This course discusses sev-eral classes of optimization problems (including linear, quadratic, integer,dynamic, stochastic, conic, and robust programming) encountered in ﬁnan-cial models. For each problem class, after introducing the relevant theory(optimality conditions, duality, etc.) and eﬃcient solution methods, we dis-cuss several problems of mathematical ﬁnance that can be modeled withinthis problem class. In addition to classical and well-known models suchas Markowitz’ mean-variance optimization model we present some neweroptimization models for a variety of ﬁnancial problems.
This book has its origins in courses taught at Carnegie Mellon Universityin the Masters program in Computational Finance and in the MBA programat the Tepper School of Business (G´erard Cornu´ejols), and at the Tokyo In-stitute of Technology, Japan, and the University of Coimbra, Portugal (RehaT¨ut¨unc¨u). We thank the attendants of these courses for their feedback and
for many stimulating discussions. We would also like to thank the colleagueswho provided the initial impetus for this project, especially Michael Trick,John Hooker, Sanjay Srivastava, Rick Green, Yanjun Li, Lu´ıs Vicente andMasakazu Kojima. Various drafts of this book were experimented with inclass by Javier Pe˜na, Fran¸cois Margot, Miroslav Karamanov and KathieCameron, and we thank them for their comments.