Editorial

INVITATION TO THE SVOR/ASRO TUTORIAL

"Current trends in Financial Modeling" is the title of the SVOR-tutorial of this coming fall which is jointly organized by SVOR and RiskLab of ETHZ. The organizers have invited leading scholars from mathematical finance and operations research to lecture about recent developments in financial modeling applied to risk management within financial institutions.

The term "risk" is an entire science in the world of finance. Banks and insurance companies need mathematical models to understand and cope with the management of risk arising from modern products in finance such as options, futures and swaps. The aim of this tutorial is to expose the participants to the basic conceptual thinking underlying the notion of risk in finance and its implication for management of uncertainties in financial investments.

The methodological framework of option theory has been successfully applied to capture the value of managerial flexibility. Real option theory complements the popular net present value concept for project evaluation by valuing in built decisions along the path of a project, such as the option to abandon, delay or extend a project.

The first day is devoted to a better understanding of risk modeling and measurement. The recent notion of a coherent risk measure (introduced by F. Delbaen and D. Heath among others) led to fundamental change of our understanding of risk in finance and in particular the shortcomings of the popular VaR concept. Indeed, coherent risk measure and optimization are conceptually closely linked and it is not a surprise, that one of this measure, the shortfall risk, leads to efficient techniques for mean-shortfall portfolio optimization as a linear optimization problem.

The second day demonstrates the power of dynamic or stochastic optimization techniques to deal with uncertainties in financial investments. Of particular interest is the mathematical concepts for the valuation of real options by modeling managerial flexibility and uncertainty in a decision tree evolving over time (similar to the pricing of (American) options). I am convinced, that real option theory will replace the NPV concept, eventually.

The organizer would be happy to count you among the participants and look forward to welcoming you at he Hotel Seepark in Thun.

Dr. Heinz Schiltknecht, Organizing Committee
h.sch@mathconsult.com