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Table Of Contents

Introduction
1.1 Optimization Problems
1.1.1 Linear Programming
1.1.2 Quadratic Programming
1.1.3 Conic Optimization
1.1.4 Integer Programming
1.2. OPTIMIZATION WITH DATA UNCERTAINTY 13
1.1.5 Dynamic Programming
1.2 Optimization with Data Uncertainty
1.2.1 Stochastic Programming
1.2.2 Robust Optimization
1.3 Financial Mathematics
1.3.1 Portfolio Selection and Asset Allocation
1.3.2 Pricing and Hedging of Options
1.3.3 Risk Management
1.3.4 Asset/Liability Management
2.1 The Linear Programming Problem
2.2 Duality
2.3 Optimality Conditions
2.4 The Simplex Method
2.4.1 Basic Solutions
2.4.2 Simplex Iterations
2.4.3 The Tableau Form of the Simplex Method
2.4.4 Graphical Interpretation
2.4.5 The Dual Simplex Method
2.4.6 Alternative to the Simplex Method
3.1 Short Term Financing
3.1.1 Modeling
3.1.2 Solving the Model with SOLVER
3.1.3 Interpreting the output of SOLVER
3.1.4 Modeling Languages
3.1.5 Features of Linear Programs
3.2 Dedication
3.3. SENSITIVITY ANALYSIS FOR LINEAR PROGRAMMING 53
3.3 Sensitivity Analysis for Linear Programming
3.3.1 Short Term Financing
3.3.2 Dedication
3.4 Case Study
4.1.1 Replication
4.1.2 Risk-Neutral Probabilities
4.1.3 The Fundamental Theorem of Asset Pricing
4.2 Arbitrage Detection Using Linear Program-
4.3 Exercises
5.1 Introduction
5.2 Software
5.3 Univariate Optimization
5.3.1 Binary search
5.3.2 Newton’s Method
5.3.3 Approximate Line Search
5.4 Unconstrained Optimization
5.4.1 Steepest Descent
5.5 Constrained Optimization
5.5.1 The generalized reduced gradient method
5.6. NONSMOOTH OPTIMIZATION: SUBGRADIENT METHODS 99
5.5.2 Sequential Quadratic Programming
5.6 Nonsmooth Optimization: Subgradient Meth-
5.7 Exercises
6.1 Volatility Estimation with GARCH Models
6.2 Estimating a Volatility Surface
7.1 The Quadratic Programming Problem
7.2 Optimality Conditions
7.3 Interior-Point Methods
7.4 The Central Path
7.5 Interior-Point Methods
7.5.1 Path-Following Algorithms
7.5.2 Centered Newton directions
7.5.3 Neighborhoods of the Central Path
7.5.4 A Long-Step Path-Following Algorithm
Algorithm 7.2 Long-Step Path-Following Algorithm
7.5.5 Starting from an Infeasible Point
7.6 QP software
7.7 Exercises
8.1 Mean-Variance Optimization
8.1.1 Example
8.1.2 Large-Scale Portfolio Optimization
8.1.3 The Black-Litterman Model
8.1.4 Mean-Absolute Deviation to Estimate Risk
8.2 Maximizing the Sharpe Ratio
8.3 Returns-Based Style Analysis
8.4 Recovering Risk-Neural Probabilities from Op-
8.5 Exercises
8.6 Case Study
Conic Optimization Models
9.1 Approximating Covariance Matrices
9.2 Recovering Risk-Neural Probabilities from Op-
10.1 Introduction
10.2 Modeling Logical Conditions
10.3 Solving Mixed Integer Linear Programs
10.3.1 Linear Programming Relaxation
10.3.2 Branch and Bound
10.3.3 Cutting Planes
10.3.4 Branch and Cut
11.1 Combinatorial Auctions
11.2 The Lockbox Problem
11.3 Constructing an Index Fund
11.3.1 A Large-Scale Deterministic Model
12.1 Introduction
12.1.1 Backward Recursion
12.1.2 Forward Recursion
12.4 Stochastic Dynamic Programming
13.1 A Model for American Options
13.2 Binomial Lattice
13.2.1 Specifying the parameters
13.2.2 Option Pricing
13.3 Case Study: Structuring CMO’s
13.3.1 Data
13.3.2 Enumerating possible tranches
13.3.3 A Dynamic Programming Approach
14.1 Introduction
14.2 Two Stage Problems with Recourse
14.3 Multi Stage Problems
14.4 Decomposition
14.5 Scenario Generation
14.5.1 Autoregressive model
14.5.2 Constructing scenario trees
15.1 Risk Measures
15.2 Example: Bond Portfolio Optimization
16.1 Asset/Liability Management
16.1.1 Corporate Debt Management
16.2 Synthetic Options
16.3 Case Study: Option Pricing with Transaction
16.3.1 The Standard Problem
16.3.2 Transaction Costs
17.1 Introduction to Robust Optimization
17.2 Uncertainty Sets
17.3 Different Flavors of Robustness
17.3.1 Constraint Robustness
17.3.2 Objective Robustness
17.3.3 Relative Robustness
17.3.4 Adjustable Robust Optimization
17.4 Tools for Robust Optimization
17.4.1 Ellipsoidal Uncertainty for Linear Constraints
17.4.2 Ellipsoidal Uncertainty for Quadratic Constraints
17.4.3 Saddle-Point Characterizations
18.0.4 Robust Multi-Period Portfolio Selection
18.0.5 Robust Profit Opportunities in Risky Portfolios
18.0.6 Robust Portfolio Selection
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Published by Neelu Ravi

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Published by: Neelu Ravi on May 12, 2011
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