Raya University

College of Business and Economics

Department of Management
MBA Program

A Group assignment on operational research

Assignment title: article review on application of operations research techniques to financial
markets
By:

1. Ashenafi Nega ID.No : RU/E-PG/BE/04605/11

2. Haftamu G/Hiwot ID.No : RU/E-PG/BE/04626/11
3. Haftu Haile ID.No : RU/E-PG/BE/04627/11
4. Getachew Assefa ID.No : RU/E-PG/BE/04621/11
5. Zelalem Tesfay ID.No : RU/E-PG/BE/04659/11
6. Abadi Hadis ID.No : RU/E-PG/BE/04601/11
7. Mekides Girmay ID.No : RU/E-PG/BE/04636/11
8. Azmera Hasabe ID.No : RU/E-PG/BE/04610/11

Submitted to: Girmalem Nerea (PhD)

2012 E.C
Maichew

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A critical review of The Application of Operations Research Techniques to Financial
Markets, John Board†, Charles Sutcliffe‡ and William Ziemba*

8 April 1999

† Department of Accounting and Finance, The London School of Economics and Political

Science, London WC2A 2AE, UK, e-mail j.board@lse.ac.uk, fax 0171-955-7420

‡ Accounting and Finance Division, The School of Management, The University of

Southampton, Southampton SO17 1BJ, UK, e-mail cms@soton.ac.uk, fax +44 1703

593844

* Management Science Division, Faculty of Commerce and Business Administration,

University of British Columbia, 2053 Main Mall, Vancouver, B.C. Canada V6T 1Z2, e-
mail ziemba@interchange.ubc.ca

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 1. Introduction
OR utilizes the planned approach and an interdisciplinary team in order to represent complex
functional relationships as mathematical models for the purpose of providing a quantitative
analysis’’. Operation research (OR) plays a crucial role in evaluating certain financial issues such
as foreign exchange market, securities development, market regulations, debt, etc. OR helps in
solving these problems and provides a proper solution to it. The research done on the financial
market has provided us with various inputs as to when an investment should be made and when
the investment should be sold off so as to earn or reap the maximum benefits out of it. The
financial market is very vulnerable to any changes and hence, people need to keep a very close
and frequent watch of it. People need a deep understanding of the financial market to act in it and
are not an area of a layman. Basics also work when it is related to small scale transactions but
when it comes to large investments; it is always advisable to take the help of an expert. For
efficient solving of problems, OR techniques that were used twenty years ago such as statistical
analysis, Linear Programming Forecasting, and Simulation were followed. Apart from these,
some other problems which could be solved through OR were funding decisions.

The financial industry is of major importance as it contributes to the creation of goods and
services by the firms which further increase the consumption and hence the growth of the
economy. In today’s world billions of people are heavily invested in the financial market even
with high uncertainty that surrounds the market. The investors need to be careful while investing
to keep the return as high as possible in a time like this. And the returns ultimately come down to
the person’s ability to make decisions based on quantitative data and the analysis of that data.
This is where Operations Research (OR) comes into play. Operations Research plays a vital role
in the analysis of certain financial problems such as foreign exchange markets, design securities,
market regulations, risk evaluation and control, equity, etc. These are very complex problems
and OR makes life easy for investor analysts by quantifying these problems into mathematical
problems and in doing so, provide a viable solution. OR makes use of programming techniques
like linear programming, Quadratic, Integer and also Goal and Dynamic programming to help a
company to find better prospects of investment, minimise its cost, help others to grow through
proper allocation of resources, etc. the techniques may help the companies to save themselves
from investing in an area which may turn bad for them. Through this research paper we would

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like to analyse the OR techniques that can be used to better understand and interpret the financial
market. These techniques can be applied to the problems that are faced by investors in the
financial market. These techniques should be made aware to everyone so that everyone takes
informed decisions regarding their investments. The proper application can be very fruitful for an
economy as the probability of bad investments will decrease.

1. Critical reflection
1. The research method used for the study and the sampling techniques (whether Probability or non

probability) are not well defined by the reviewer

2. Both primary data and secondary data must be used for the study of the finical marketing analysis. So

the reviewer only focuses on secondary data. Since secondary data is the cheap source.

3. The reviewer does not follow the actual research methodology structure review method such as

abstract, introduction literature review .research design and analysis and finally conclusion .So the

reviewer mess up with the actual procedure.

4. The reviewer describes multiple models of OR. However he doesn’t really makes critics on how each

model can be implemented to finical marketing, such as their pros and cons. The variables such as

dependent and independent variables relate to each other and how the objective function maximize

and minimize and the different risk analysis such as certainty and uncertainty affect each model.

5. The reviewer does not criticize on the hypothesis ,statement of the problem ,what claims are made

,what conclusions are drawn and justified on the reviewed article

6. The reviewer does not explain the limitation of OR model for e.g. Cost ,non-realistic and its

complexity

7. The reviewer doesn’t explain the reliability and the evidence of the research. The findings made by

the author are not well reflected in the reviewed paper.

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2. Summary of the Article

OR techniques are applied to non-portfolio problems in financial markets, such as the equity,
debt, and foreign exchange markets and the corresponding derivatives markets. Finance
problems are an excellent application area for OR researchers. OR techniques are used to value
financial instruments, identify market imperfections, design securities, regulate markets, evaluate
and control risks, model strategic problems, and understand the functioning of financial markets.
Mathematical programming is probably the most widely applied OR technique, but Monte Carlo
simulation methods are of increasing importance. With the improvements in the real-time
availability of data and the power of computers, the role of OR techniques in financial markets
can only increase.

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Reference

1. Board J., Sutcliffe C., Ziemba W, “Applying Operations Research Techniques to Financial
Markets”, Informs, Vol. 33, No. 2, 2003, pp. 12-24.
2. Cesarone F., Scozzari A., Tardella F.,“Portfolio selection problems in practice: A comparison
between linear and quadratic optimization models”, Interfaces, 2010.
3. Marling H., Emanuelsson S.,“The Markowitz Portfolio Theory”, 2012, Journal of Operations
Research society
4. Rana D., Korovyakovskaya I., Thiagarajan P.,“A comprehensive framework of classifying
management science/operation techniques applications in banking”, 2011, Journal of academy of
Business and Economics, Vol. 11
5. M. Geoffrion, Krishnan R.,“Prospects for Operations Research in the E-Business Era”, 2001,
Interfaces, Vol. 31No. 2, pp. 6-36.
6. Board J., Sutcliffe C., Ziemba W.,“The Application of Operations Research Techniques to
Financial Markets”, 1999, Working Papers from University of Southampton - Department of
Accounting and Management Science.

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