A Serious Scientific Approach to 'Money': Financial Engineering

Norio Hibiki (Associate Professor, Department of Industrial and Systems Engineering)

The issue of 'money' is very familiar to us, yet it is a subject we are not properly taught in school. However, with various financial issues related to our daily lives, such as pensions and home loans, we are now in an age where we can no longer afford to be ignorant.

Financial engineering is an academic field that attempts to solve various problems in financial markets and transactions using engineering methods. Specifically, its main role is to build theories and mathematical models for problem-solving and to perform risk management (evaluation and control) of cash flows (the flow of money) associated with investments and other activities. Recently, it has been utilized not only by financial institutions but also widely in corporate activities. I am often asked, "Why study finance in the Faculty of Science and Technology?" Perhaps this explanation has convinced you.

Let me introduce an easy-to-understand example. Many corporate revenues are affected by the weather. For instance, a beer company profits when temperatures rise in the summer and beer sells well, but loses money when temperatures fall. How can this risk be eliminated? There are two methods: (1) control the temperature, or (2) create a system to compensate for lost revenue only when the temperature drops. While (1) is impossible, the system for (2) can be created through financial transactions. This method is called a weather derivative and can be used to stabilize corporate revenues. The question of "What is the value of the right to receive this compensation?" is a key problem in financial engineering.

In my laboratory, we are currently conducting research on topics such as (A) long-term asset and liability allocation models for pension fund management and individual life-cycle planning, and (B) risk management related to research and development and patent valuation. (A) addresses financial issues related to our daily lives, while (B) involves applying financial engineering methods to business risk management. By mastering modeling techniques and quantitative analysis methods for solving such financial problems, we aim to develop solutions that are 'usable in actual financial transactions.'

The keyword in the problem of 'money' is 'risk.' Unfortunately, there is no 'guaranteed profitable' method in the world that comes without risk. My educational goal is to train financial engineers who can solve problems by understanding risk and utilizing the diverse knowledge and wisdom learned in the Department of Industrial and Systems Engineering.

In the laboratory, students conduct research in a free atmosphere and engage in discussions that include faculty members.

Recently, many books related to financial engineering have been published. I also write and translate books to feed back my research and educational achievements to society.

Communication and physical stamina are also important for research. I play softball with the students in my laboratory.