FINANCIAL MATHEMATICS AND ENGINEERING PROGRAM

As any investor can tell you, predicting how stocks and bonds will perform over the next six or 12 months is far from an exact science. Financial institutions, however, are increasingly turning to mathematicians to model the changing values of stocks, commodities and other financial assets.

To help meet the demand for trained financial mathematicians, faculty members from across North Carolina State University are working to create a new financial mathematics program that would train graduate students to assess financial risks and assign value to complex transactions.

The new NC State Financial Mathematics and Engineering Master's Degree Program -- if approved by the university's Board of Trustees and The University of North Carolina system's Board of Governors -- would begin training students as soon as the 2002-03 academic year.

For more information about the proposed Financial Mathematics and Engineering Program, look on the Web at www.ncsu.edu/crsc/events/RFME.html.

Fueled in part by the explosive growth in financial markets, financial mathematics is a hot topic among financial institutions -- including banks, investment firms, financial trading companies, insurance companies, energy companies and agribusinesses -- that have to quantify the riskiness of investments. Those entities, and the government institutions that regulate them, need to hire professionals with technical training in financial mathematics.

The coordinator of this effort, Dr. Jean-Pierre Fouque, NC State professor of mathematics, explains that NC State offers many classes useful for prospective financial mathematicians, but that the new degree program would coordinate those courses and the academic departments that offer them.

"All the pieces already exist on campus: We have the people, we have the classes, and the businesses are asking for it and the students are asking for it," Fouque said. "There is a need for well-educated people who have this kind of degree, so this is the right time to create this program."

Faculty members from five NC State academic departments are involved in the planning effort: Agricultural and Resource Economics; Economics; Industrial Engineering; Mathematics; and Statistics. Those departments span four of the university's colleges: Agriculture and Life Sciences; Engineering; Management; and Physical and Mathematical Sciences.

One goal of financial mathematics, Fouque says, is to model the evolution of the value of stocks, commodities and other financial assets to correctly price and hedge options written on them. This requires sophisticated tools from the theory and statistics of stochastic processes, partial differential equations and numerical analysis.

Much financial mathematics research is based on the work of Myron Scholes, Robert Merton and the late Fischer Black, economists who in the 1970s developed a formula that estimates how much a stock option is worth at any point in time. The "Black-Scholes Formula" gives investors and businesses a tool for reducing their financial vulnerability to changing market conditions by determining the risk of their investments.

Scholes and Merton later earned the 1997 Nobel Prize in Economics for their work on the formula, which has been called as important to finance as the discovery of DNA has been to biology. Their work was the subject of a recent PBS Nova program called "Trillion Dollar Bet."

Still, unlike other scientific disciplines, researchers in financial mathematics cannot rely on basic "first principles" that explain how the science works -- in this case, how the value of financial assets changes over time.

"As the market is becoming more complex every day, more sophisticated mathematical, statistical and computational tools are needed to fully understand what's going on," said Fouque, who co-authored the book Derivatives in Financial Markets with Stochastic Volatility (Cambridge University Press, 2000). Information about his research is online at www.math.ncsu.edu/~fouque.

Contact Dr. Jean-Pierre Fouque, 919-515-8588, fouque@math.ncsu.edu.