CounterPartyHazardLow.java
package org.drip.sample.burgard2012;
import org.drip.numerical.common.FormatUtil;
import org.drip.service.env.EnvManager;
/*
* -*- 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
*
* 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>CounterPartyHazardLow</i> estimates the CVA Relative to V for a Call Option bought by the Bank for
* different Close Outs and Funding Spreads using the Burgard and Kjaer (2011) Methodology for the Case where
* the Counter Party Hazard is Low (Zero). The References are:
*
* <br><br>
* <ul>
* <li>
* Burgard, C., and M. Kjaer (2014): PDE Representations of Derivatives with Bilateral Counter-party
* Risk and Funding Costs <i>Journal of Credit Risk</i> <b>7 (3)</b> 1-19
* </li>
* <li>
* Cesari, G., J. Aquilina, N. Charpillon, X. Filipovic, G. Lee, and L. Manda (2009): <i>Modeling,
* Pricing, and Hedging Counter-party Credit Exposure - A Technical Guide</i> <b>Springer
* Finance</b> New York
* </li>
* <li>
* Gregory, J. (2009): Being Two-faced over Counter-party Credit Risk <i>Risk</i> <b>20 (2)</b>
* 86-90
* </li>
* <li>
* Li, B., and Y. Tang (2007): <i>Quantitative Analysis, Derivatives Modeling, and Trading
* Strategies in the Presence of Counter-party Credit Risk for the Fixed Income Market</i>
* <b>World Scientific Publishing</b> Singapore
* </li>
* <li>
* Piterbarg, V. (2010): Funding Beyond Discounting: Collateral Agreements and Derivatives Pricing
* <i>Risk</i> <b>21 (2)</b> 97-102
* </li>
* </ul>
*
* <br><br>
* <ul>
* <li><b>Module </b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/PortfolioCore.md">Portfolio Core Module</a></li>
* <li><b>Library</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/XVAAnalyticsLibrary.md">XVA Analytics Library</a></li>
* <li><b>Project</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/src/main/java/org/drip/sample/README.md">DROP API Construction and Usage</a></li>
* <li><b>Package</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/src/main/java/org/drip/sample/burgard2012/README.md">Burgard Kjaer (2012) Valuation Adjustments</a></li>
* </ul>
* <br><br>
*
* @author Lakshmi Krishnamurthy
*/
public class CounterPartyHazardLow {
private static final void CVA (
final double dblT,
final double dblRB,
final double dblRC,
final double dblLambdaB,
final double dblLambdaC)
throws Exception
{
double dblMTM_XVA___Funding_0 = -1. * (1. - Math.exp (-1. * (1. - dblRC) * dblLambdaC * dblT));
double dblMTM_XVA___Funding_Bank = -1. * (1. - Math.exp (-1. * ((1. - dblRB) * dblLambdaB + (1. - dblRC) * dblLambdaC) * dblT));
double dblMTM_Fair__Funding_0 = -1. * (1. - dblRC) * dblLambdaC *
(1. - Math.exp (-1. * (dblLambdaB + dblLambdaC) * dblT)) /
(dblLambdaB + dblLambdaC);
double dblMTM_Fair__Funding_Bank = -1. * ((1. - dblRB) * dblLambdaB + (1. - dblRC) * dblLambdaC) *
(1. - Math.exp (-1. * (dblLambdaB + dblLambdaC) * dblT)) /
(dblLambdaB + dblLambdaC);
System.out.println ("\t|| " +
FormatUtil.FormatDouble (dblLambdaB , 1, 1, 100.) + "% => " +
FormatUtil.FormatDouble (dblMTM_XVA___Funding_0 , 2, 2, 100.) + "% | " +
FormatUtil.FormatDouble (dblMTM_XVA___Funding_Bank, 2, 2, 100.) + "% | " +
FormatUtil.FormatDouble (dblMTM_Fair__Funding_0 , 2, 2, 100.) + "% | " +
FormatUtil.FormatDouble (dblMTM_Fair__Funding_Bank, 2, 2, 100.) + "% ||"
);
}
public static final void main (
final String[] astrArgs)
throws Exception
{
EnvManager.InitEnv ("");
double dblLambdaC = 0.00;
double dblRB = 0.4;
double dblRC = 0.4;
double dblT = 5.;
double[] adblLambdaB = new double[] {
0.00001,
0.005,
0.01,
0.015,
0.02,
0.025,
0.03,
0.035,
0.04,
0.045,
0.05
};
System.out.println();
System.out.println ("\t||--------------------------------------------------||");
System.out.println ("\t|| CVA UNDER LOW COUNTER PARTY HAZARD ||");
System.out.println ("\t||--------------------------------------------------||");
System.out.println ("\t|| L -> R: ||");
System.out.println ("\t|| - Close Out => MTM XVA ||");
System.out.println ("\t|| - Funding Spread => None ||");
System.out.println ("\t|| - Close Out => MTM Fair Value ||");
System.out.println ("\t|| - Funding Spread => Bank ||");
System.out.println ("\t||--------------------------------------------------||");
for (double dblLambdaB : adblLambdaB)
CVA (
dblT,
dblRB,
dblRC,
dblLambdaB,
dblLambdaC
);
System.out.println ("\t||--------------------------------------------------||");
System.out.println();
EnvManager.TerminateEnv();
}
}