Hedging your bets

Peter works in computational finance, using computer algorithms to assess financial risk, determine costs and develop investment strategies. Much of Peter's work has been in "hedging".

"Hedging is about managing risk and optimizing investment. A good hedge insulates you against the unknown", states Peter. "A computational finance approach uses science, mathematics and computing to make precise statements about something that seems uncertain so that better decisions can be made."

In the financial industry, hedging protects against loss and guarantees a specific return - much like an insurance policy. Fund managers dynamically manage bonds, options and other financial products to make sure that investments are not at risk, regardless of what happens in the market. For instance, managers can take "long" position in oil stocks, and "short" positions in oil futures, so that no matter how oil prices fluctuate, the risk would be minimized.

"Before, we assumed that the unknown random changes in prices were small. Now we can take the big jumps, the sudden big changes or events and hedge against those as well."

Peter and his grad students have applied the same principles and algorithms to decision-making problems in telecommunications, government and environmental issues. Want to know more about computational finance? Download Peter's paper "An introduction to Computational Finance without Agonizing Pain."