April 17, 1997
Vol. 16, No. 15

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    Cutting-edge program keeps pace with financial field

    The Master of Science in Financial Mathematics, the first program of its kind in the country, will soon be adding a new breed of professional to the financial world: mathematically trained people with expertise in the financial markets.

    "The world of finance has changed in the direction of very complicated financial instruments," said Niels Nygaard, Director of the new program and Professor in Mathematics. "Technology and science are making their way into finance, and it is the computer and mathematical methods -- and the people who are trained to utilize them -- that make it possible to design these complicated instruments."

    Robert Zimmer, Associate Provost and former Chairman of Mathematics, who helped devise the program, said, "Previously, the gaps have been filled with Ph.D.s in math and physics. Instead, we're offering a degree program that trains people specifically for jobs in mathematical finance."

    The graduate program in financial mathematics was devised over the course of a year and involved a great deal of input from financial practitioners, Nygaard said. "What's great about this program is that it didn't just come out of the heads of a few academics at the U of C, it was designed in collaboration with the financial industry. And professionals in the industry also teach in the program. We talked to many people to find out what skills were needed.

    "It also combines the resources of the University -- in mathematics, statistics and economics -- in a way that makes the end result much more than the sum of its parts," he said. "When you put different resources together in a non-traditional way, you really can end up with something extraordinary."

    Students in the one-year (full-time) or three-year (part-time) program are a mix of quantitatively skilled people; math, physics or engineering graduates; or people already working in the field who are looking for enrichment, Zimmer said. Currently, of the 30 students enrolled, approximately three-quarters are enrolled full time, Nygaard said.

    The course work consists of three sequences, each three quarters long, in mathematical methods, probability theory and economics, and financial applications and simulations. They are taught, respectively, by faculty members in mathematics, statistics and economics, and practitioners from Chicago banks and financial institutions. The courses are offered in the evenings to accommodate students who continue to work full time.

    Jack Cowan, Professor in Mathematics, who teaches differential equations and neural networks in the program, explained that the underlying mathematics used in physics and finance is quite similar. "The mathematics that traders use to price options and stocks are basically the same equations that physicists use to describe the flow of heat. If you come from an engineering or physics background and you're used to dealing with the transfer of heat, you can apply the same mathematics to pricing options," he said.

    Options are financial instruments that companies use to protect themselves against fluctuations in the market or in currency, for example, by agreeing to buy or sell an asset at a certain price. These options can be bought and sold the same way stocks and bonds are traded. These types of instruments are called "derivatives," because their prices are derived from the market prices of the underlying assets.

    The graduate program in financial mathematics provides its students with a basic understanding of theoretical models used to price derivatives. "We not only teach students the models but also show them how they are applied in practice, as well as their limitations and what can go wrong," Nygaard said. "In an ordinary mathematics course, a student would learn a broad spectrum of mathematics. We target the mathematics that can be applied in a financial context."

    Graduates of the program may find opportunities in buying or selling derivatives for investment banks, industrial companies or hedge funds, for example. "I hope this will soon become a degree that is recognized throughout the field," Nygaard said, "and that recruiters will start looking for people who have this degree."

    The program has already garnered attention in academic circles: Nygaard said, for instance, that Columbia University is planning to launch a program modeled on Chicago's program next academic year.