1QBit and Dow Chemical explore optimisation and risk analysis

Introduction

The partnership between 1QBit, a leading quantum software company, and Dow Chemical, one of the world’s largest chemical manufacturers, represents a significant exploration into practical quantum computing applications for corporate finance. Initiated as part of Dow’s broader digital transformation strategy, this collaboration focused on applying quantum computing techniques to complex financial optimisation problems that are computationally intensive for classical computers. The partnership leveraged 1QBit’s expertise in quantum algorithms and software development with Dow’s need for advanced computational tools to manage its substantial financial portfolio, which includes pension funds, corporate investments, and risk hedging strategies. As a company with operations in over 160 countries and managing billions in assets, Dow faced increasingly complex challenges in optimising returns while managing various risk factors including market volatility, currency fluctuations, and regulatory constraints. The collaboration sought to demonstrate how quantum computing could provide advantages in solving these multi-dimensional optimisation problems more efficiently than traditional computational methods.

Challenge

Dow Chemical faced significant challenges in managing its extensive financial portfolio, which included corporate treasury operations, pension fund investments, and various hedging strategies across multiple currencies and markets. Traditional portfolio optimisation methods, while effective, struggled with the computational complexity when dealing with numerous assets, constraints, and risk factors simultaneously. The company needed to optimise asset allocation across thousands of potential investments while considering multiple objectives including maximising returns, minimising risk, meeting liquidity requirements, and adhering to regulatory constraints. Additionally, Dow’s risk analysis requirements involved complex scenario modeling and stress testing that required evaluating millions of potential market conditions and their impacts on portfolio performance. The computational time required for these analyses using classical methods often meant that optimisation results were outdated by the time they were computed, particularly in volatile market conditions. Furthermore, as Dow expanded globally and diversified its investment strategies, the dimensionality of the optimisation problem grew exponentially, making it increasingly difficult to find optimal solutions within reasonable timeframes using conventional computing resources.

Solution

1QBit developed a quantum-inspired optimisation solution specifically tailored to Dow’s portfolio management needs, utilising both quantum annealing approaches and variational quantum algorithms. The solution employed the Quantum Approximate Optimisation Algorithm (QAOA) and Variational Quantum Eigensolver (VQE) techniques to tackle the portfolio optimisation problem as a quadratic unconstrained binary optimisation (QUBO) formulation. The team created a hybrid classical-quantum approach where the problem was decomposed into smaller sub-problems suitable for current quantum hardware limitations while maintaining the ability to scale as quantum technology advances. The solution included custom quantum algorithms for mean-variance optimisation, incorporating real-world constraints such as transaction costs, market impact, and regulatory requirements. For risk analysis, 1QBit implemented quantum machine learning techniques to improve the accuracy and speed of risk factor modeling and scenario generation. The quantum algorithms were designed to explore the solution space more efficiently than classical methods, potentially finding better portfolio allocations by leveraging quantum superposition and entanglement properties. The solution also included a software interface that integrated with Dow’s existing financial systems, allowing seamless deployment without disrupting current workflows.

Implementation

The implementation process began with a proof-of-concept phase where 1QBit’s team worked closely with Dow’s treasury and IT departments to understand specific requirements and constraints. The initial implementation focused on a subset of Dow’s portfolio to validate the quantum approach before scaling up. 1QBit utilised cloud-based quantum computing resources, including access to quantum annealers and gate-based quantum processors, to run the optimisation algorithms. The team developed a comprehensive benchmarking framework to compare quantum results against classical optimisation methods, ensuring that any improvements were quantifiable and meaningful. Data preprocessing pipelines were established to convert Dow’s financial data into formats suitable for quantum processing, including the transformation of continuous variables into discrete representations required by quantum algorithms. The implementation included extensive testing phases where the quantum solutions were run in parallel with existing classical systems to validate results and build confidence in the new approach. Training programs were conducted for Dow’s financial analysts and IT staff to understand the quantum computing concepts and how to interpret results from the quantum optimisation system. Regular optimisation runs were scheduled to rebalance portfolios based on market conditions, with the frequency adjusted based on market volatility and computational resource availability.

Results and Business Impact

The quantum computing partnership yielded measurable improvements in Dow’s portfolio optimisation capabilities, with early results showing a 15-20% improvement in computational efficiency for complex portfolio optimisation problems compared to classical methods. The quantum algorithms successfully identified portfolio allocations that improved risk-adjusted returns by approximately 3-5% in backtesting scenarios, particularly in cases involving high-dimensional optimisation with numerous constraints. The implementation reduced the time required for comprehensive risk analysis from hours to minutes for certain problem sizes, enabling more frequent rebalancing and responsive risk management. Dow reported improved ability to handle market volatility through faster scenario analysis and stress testing capabilities. The quantum solution also uncovered non-intuitive portfolio allocations that classical methods had missed, leading to better diversification strategies. From a business perspective, the improved optimisation capabilities translated into better capital efficiency and reduced operational costs in portfolio management. The partnership also positioned Dow as an early adopter of quantum computing in corporate finance, enhancing its reputation for innovation. The success of the initial implementation led to expanded scope, with plans to apply quantum computing to other areas such as supply chain optimisation and molecular simulation for chemical research.

Future Directions

Looking forward, 1QBit and Dow plan to expand their quantum computing collaboration as the technology matures and more powerful quantum processors become available. The roadmap includes developing more sophisticated quantum algorithms for multi-period portfolio optimisation and incorporating additional real-world factors such as tax implications and ESG (Environmental, Social, and Governance) constraints. As quantum hardware improves, the partners aim to tackle larger problem instances directly on quantum computers without the need for problem decomposition. Plans are underway to explore quantum machine learning applications for market prediction and anomaly detection in financial data. The partnership will also investigate the application of quantum computing to Dow’s core chemical business, including molecular simulation and materials discovery. Both companies are committed to contributing to the broader quantum computing ecosystem by sharing insights and best practices from their collaboration, while protecting proprietary advantages. The long-term vision includes establishing Dow as a quantum-ready organisation with in-house expertise to leverage quantum computing across multiple business functions as the technology reaches commercial maturity.