BlackNormalAlgorithm.java
package org.drip.pricer.option;
/*
* -*- mode: java; tab-width: 4; indent-tabs-mode: nil; c-basic-offset: 4 -*-
*/
/*!
* Copyright (C) 2020 Lakshmi Krishnamurthy
* Copyright (C) 2019 Lakshmi Krishnamurthy
* Copyright (C) 2018 Lakshmi Krishnamurthy
* Copyright (C) 2017 Lakshmi Krishnamurthy
* Copyright (C) 2016 Lakshmi Krishnamurthy
* Copyright (C) 2015 Lakshmi Krishnamurthy
* Copyright (C) 2014 Lakshmi Krishnamurthy
*
* This file is part of DROP, an open-source library targeting analytics/risk, transaction cost analytics,
* asset liability management analytics, capital, exposure, and margin analytics, valuation adjustment
* analytics, and portfolio construction analytics within and across fixed income, credit, commodity,
* equity, FX, and structured products. It also includes auxiliary libraries for algorithm support,
* numerical analysis, numerical optimization, spline builder, model validation, statistical learning,
* and computational support.
*
* https://lakshmidrip.github.io/DROP/
*
* DROP is composed of three modules:
*
* - DROP Product Core - https://lakshmidrip.github.io/DROP-Product-Core/
* - DROP Portfolio Core - https://lakshmidrip.github.io/DROP-Portfolio-Core/
* - DROP Computational Core - https://lakshmidrip.github.io/DROP-Computational-Core/
*
* DROP Product Core implements libraries for the following:
* - Fixed Income Analytics
* - Loan Analytics
* - Transaction Cost Analytics
*
* DROP Portfolio Core implements libraries for the following:
* - Asset Allocation Analytics
* - Asset Liability Management Analytics
* - Capital Estimation Analytics
* - Exposure Analytics
* - Margin Analytics
* - XVA Analytics
*
* DROP Computational Core implements libraries for the following:
* - Algorithm Support
* - Computation Support
* - Function Analysis
* - Model Validation
* - Numerical Analysis
* - Numerical Optimizer
* - Spline Builder
* - Statistical Learning
*
* Documentation for DROP is Spread Over:
*
* - Main => https://lakshmidrip.github.io/DROP/
* - Wiki => https://github.com/lakshmiDRIP/DROP/wiki
* - GitHub => https://github.com/lakshmiDRIP/DROP
* - Repo Layout Taxonomy => https://github.com/lakshmiDRIP/DROP/blob/master/Taxonomy.md
* - Javadoc => https://lakshmidrip.github.io/DROP/Javadoc/index.html
* - Technical Specifications => https://github.com/lakshmiDRIP/DROP/tree/master/Docs/Internal
* - Release Versions => https://lakshmidrip.github.io/DROP/version.html
* - Community Credits => https://lakshmidrip.github.io/DROP/credits.html
* - Issues Catalog => https://github.com/lakshmiDRIP/DROP/issues
* - JUnit => https://lakshmidrip.github.io/DROP/junit/index.html
* - Jacoco => https://lakshmidrip.github.io/DROP/jacoco/index.html
*
* Licensed under the Apache License, Version 2.0 (the "License");
* you may not use this file except in compliance with the License.
*
* You may obtain a copy of the License at
* http://www.apache.org/licenses/LICENSE-2.0
*
* Unless required by applicable law or agreed to in writing, software
* distributed under the License is distributed on an "AS IS" BASIS,
* WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
*
* See the License for the specific language governing permissions and
* limitations under the License.
*/
/**
* <i>BlackNormalAlgorithm</i> implements the Black Normal European Call and Put Options Pricer.
*
* <br><br>
* <ul>
* <li><b>Module </b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/ProductCore.md">Product Core Module</a></li>
* <li><b>Library</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/FixedIncomeAnalyticsLibrary.md">Fixed Income Analytics</a></li>
* <li><b>Project</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/src/main/java/org/drip/pricer/README.md">Custom Pricing Algorithms and the Derivative Fokker Planck Trajectory Generators</a></li>
* <li><b>Package</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/src/main/java/org/drip/pricer/option/README.md">Deterministic/Stochastic Volatility Settings/Greeks</a></li>
* </ul>
* <br><br>
*
* @author Lakshmi Krishnamurthy
*/
public class BlackNormalAlgorithm extends org.drip.pricer.option.FokkerPlanckGenerator {
/**
* Empty BlackNormalAlgorithm Constructor - nothing to be filled in with
*/
public BlackNormalAlgorithm()
{
}
@Override public double payoff (
final double dblStrike,
final double dblTimeToExpiry,
final double dblRiskFreeRate,
final double dblUnderlier,
final boolean bIsPut,
final boolean bIsForward,
final double dblVolatility,
final boolean bAsPrice)
throws java.lang.Exception
{
if (!org.drip.numerical.common.NumberUtil.IsValid (dblStrike) ||
!org.drip.numerical.common.NumberUtil.IsValid (dblUnderlier) ||
!org.drip.numerical.common.NumberUtil.IsValid (dblVolatility) ||
!org.drip.numerical.common.NumberUtil.IsValid (dblTimeToExpiry) ||
!org.drip.numerical.common.NumberUtil.IsValid (dblRiskFreeRate))
throw new java.lang.Exception ("BlackNormalAlgorithm::payoff => Invalid Inputs");
double dblD1D2Diff = dblVolatility * java.lang.Math.sqrt (dblTimeToExpiry);
double dblDF = java.lang.Math.exp (-1. * dblRiskFreeRate * dblTimeToExpiry);
double dblForward = bIsForward ? dblUnderlier : dblUnderlier / dblDF;
double dblD = (dblForward - dblStrike) / dblD1D2Diff;
double dblCallPayoff = dblForward * dblD1D2Diff * java.lang.Math.exp (-0.5 * dblD * dblD) /
java.lang.Math.sqrt (2. * java.lang.Math.PI) / dblForward - dblStrike * -1. * dblD1D2Diff * dblD
* org.drip.measure.gaussian.NormalQuadrature.CDF (dblD) / dblStrike;
if (!bAsPrice) return bIsPut ? dblCallPayoff + dblStrike - dblForward : dblCallPayoff;
return bIsPut ? dblDF * (dblCallPayoff + dblStrike - dblForward) : dblDF * dblCallPayoff;
}
@Override public org.drip.pricer.option.Greeks greeks (
final double dblStrike,
final double dblTimeToExpiry,
final double dblRiskFreeRate,
final double dblUnderlier,
final boolean bIsPut,
final boolean bIsForward,
final double dblVolatility)
{
if (!org.drip.numerical.common.NumberUtil.IsValid (dblStrike) ||
!org.drip.numerical.common.NumberUtil.IsValid (dblUnderlier) ||
!org.drip.numerical.common.NumberUtil.IsValid (dblVolatility) ||
!org.drip.numerical.common.NumberUtil.IsValid (dblTimeToExpiry) ||
!org.drip.numerical.common.NumberUtil.IsValid (dblRiskFreeRate))
return null;
double dblD1D2Diff = dblVolatility * java.lang.Math.sqrt (dblTimeToExpiry);
double dblDF = java.lang.Math.exp (-1. * dblRiskFreeRate * dblTimeToExpiry);
double dblForward = bIsForward ? dblUnderlier : dblUnderlier / dblDF;
double dblD = (dblForward - dblStrike) / dblD1D2Diff;
double dblN = java.lang.Math.exp (-0.5 * dblD * dblD) / java.lang.Math.sqrt (2. * java.lang.Math.PI);
double dblCallProb1 = dblD1D2Diff * dblN / dblForward;
try {
double dblCallProb2 = -1. * dblD1D2Diff * dblD * org.drip.measure.gaussian.NormalQuadrature.CDF (dblD)
/ dblStrike;
double dblExpectedCallPayoff = dblForward * dblCallProb1 - dblStrike * dblCallProb2;
double dblATMCallPayoff = dblForward * (dblCallProb1 - dblCallProb2);
double dblCallPrice = dblDF * dblExpectedCallPayoff;
if (!bIsPut)
return new org.drip.pricer.option.Greeks (
dblDF,
dblVolatility,
dblExpectedCallPayoff,
dblATMCallPayoff,
dblCallPrice,
dblCallProb1,
dblCallProb2,
dblCallProb1,
java.lang.Double.NaN,
java.lang.Double.NaN,
java.lang.Double.NaN,
java.lang.Double.NaN,
java.lang.Double.NaN,
java.lang.Double.NaN,
java.lang.Double.NaN,
java.lang.Double.NaN,
java.lang.Double.NaN,
java.lang.Double.NaN,
java.lang.Double.NaN
);
double dblPutProb1 = dblD * dblD1D2Diff * org.drip.measure.gaussian.NormalQuadrature.CDF (-1. * dblD) /
dblForward;
double dblPutProb2 = dblD1D2Diff * dblN / dblStrike;
return new org.drip.pricer.option.PutGreeks (
dblDF,
dblVolatility,
dblExpectedCallPayoff + dblStrike - dblForward,
dblATMCallPayoff,
dblDF * (-1. * dblForward * dblPutProb1 + dblStrike * dblPutProb2),
dblCallPrice + dblDF * (dblStrike - dblForward),
dblPutProb1,
dblPutProb2,
-1. * dblPutProb1,
java.lang.Double.NaN,
java.lang.Double.NaN,
java.lang.Double.NaN,
java.lang.Double.NaN,
java.lang.Double.NaN,
java.lang.Double.NaN,
java.lang.Double.NaN,
java.lang.Double.NaN,
java.lang.Double.NaN,
java.lang.Double.NaN,
java.lang.Double.NaN
);
} catch (java.lang.Exception e) {
e.printStackTrace();
}
return null;
}
}