CounterPartyHazardLow.java

  1. package org.drip.sample.burgard2012;

  3. import org.drip.numerical.common.FormatUtil;
  4. import org.drip.service.env.EnvManager;

  6. /*
  7.  * -*- mode: java; tab-width: 4; indent-tabs-mode: nil; c-basic-offset: 4 -*-
  8.  */

  10. /*!
  11.  * Copyright (C) 2020 Lakshmi Krishnamurthy
  12.  * Copyright (C) 2019 Lakshmi Krishnamurthy
  13.  * Copyright (C) 2018 Lakshmi Krishnamurthy
  14.  * Copyright (C) 2017 Lakshmi Krishnamurthy
  15.  * 
  16.  *  This file is part of DROP, an open-source library targeting analytics/risk, transaction cost analytics,
  17.  *      asset liability management analytics, capital, exposure, and margin analytics, valuation adjustment
  18.  *      analytics, and portfolio construction analytics within and across fixed income, credit, commodity,
  19.  *      equity, FX, and structured products. It also includes auxiliary libraries for algorithm support,
  20.  *      numerical analysis, numerical optimization, spline builder, model validation, statistical learning,
  21.  *      and computational support.
  22.  *  
  23.  *      https://lakshmidrip.github.io/DROP/
  24.  *  
  25.  *  DROP is composed of three modules:
  26.  *  
  27.  *  - DROP Product Core - https://lakshmidrip.github.io/DROP-Product-Core/
  28.  *  - DROP Portfolio Core - https://lakshmidrip.github.io/DROP-Portfolio-Core/
  29.  *  - DROP Computational Core - https://lakshmidrip.github.io/DROP-Computational-Core/
  30.  * 
  31.  *  DROP Product Core implements libraries for the following:
  32.  *  - Fixed Income Analytics
  33.  *  - Loan Analytics
  34.  *  - Transaction Cost Analytics
  35.  * 
  36.  *  DROP Portfolio Core implements libraries for the following:
  37.  *  - Asset Allocation Analytics
  38.  *  - Asset Liability Management Analytics
  39.  *  - Capital Estimation Analytics
  40.  *  - Exposure Analytics
  41.  *  - Margin Analytics
  42.  *  - XVA Analytics
  43.  * 
  44.  *  DROP Computational Core implements libraries for the following:
  45.  *  - Algorithm Support
  46.  *  - Computation Support
  47.  *  - Function Analysis
  48.  *  - Model Validation
  49.  *  - Numerical Analysis
  50.  *  - Numerical Optimizer
  51.  *  - Spline Builder
  52.  *  - Statistical Learning
  53.  * 
  54.  *  Documentation for DROP is Spread Over:
  55.  * 
  56.  *  - Main                     => https://lakshmidrip.github.io/DROP/
  57.  *  - Wiki                     => https://github.com/lakshmiDRIP/DROP/wiki
  58.  *  - GitHub                   => https://github.com/lakshmiDRIP/DROP
  59.  *  - Repo Layout Taxonomy     => https://github.com/lakshmiDRIP/DROP/blob/master/Taxonomy.md
  60.  *  - Javadoc                  => https://lakshmidrip.github.io/DROP/Javadoc/index.html
  61.  *  - Technical Specifications => https://github.com/lakshmiDRIP/DROP/tree/master/Docs/Internal
  62.  *  - Release Versions         => https://lakshmidrip.github.io/DROP/version.html
  63.  *  - Community Credits        => https://lakshmidrip.github.io/DROP/credits.html
  64.  *  - Issues Catalog           => https://github.com/lakshmiDRIP/DROP/issues
  65.  *  - JUnit                    => https://lakshmidrip.github.io/DROP/junit/index.html
  66.  *  - Jacoco                   => https://lakshmidrip.github.io/DROP/jacoco/index.html
  67.  * 
  68.  *  Licensed under the Apache License, Version 2.0 (the "License");
  69.  *      you may not use this file except in compliance with the License.
  70.  *   
  71.  *  You may obtain a copy of the License at
  72.  *      http://www.apache.org/licenses/LICENSE-2.0
  73.  *  
  74.  *  Unless required by applicable law or agreed to in writing, software
  75.  *      distributed under the License is distributed on an "AS IS" BASIS,
  76.  *      WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
  77.  *  
  78.  *  See the License for the specific language governing permissions and
  79.  *      limitations under the License.
  80.  */

  82. /**
  83.  * <i>CounterPartyHazardLow</i> estimates the CVA Relative to V for a Call Option bought by the Bank for
  84.  * different Close Outs and Funding Spreads using the Burgard and Kjaer (2011) Methodology for the Case where
  85.  * the Counter Party Hazard is Low (Zero). The References are:
  86.  *  
  87.  * <br><br>
  88.  *  <ul>
  89.  *      <li>
  90.  *          Burgard, C., and M. Kjaer (2014): PDE Representations of Derivatives with Bilateral Counter-party
  91.  *              Risk and Funding Costs <i>Journal of Credit Risk</i> <b>7 (3)</b> 1-19
  92.  *      </li>
  93.  *      <li>
  94.  *          Cesari, G., J. Aquilina, N. Charpillon, X. Filipovic, G. Lee, and L. Manda (2009): <i>Modeling,
  95.  *              Pricing, and Hedging Counter-party Credit Exposure - A Technical Guide</i> <b>Springer
  96.  *              Finance</b> New York
  97.  *      </li>
  98.  *      <li>
  99.  *          Gregory, J. (2009): Being Two-faced over Counter-party Credit Risk <i>Risk</i> <b>20 (2)</b>
  100.  *              86-90
  101.  *      </li>
  102.  *      <li>
  103.  *          Li, B., and Y. Tang (2007): <i>Quantitative Analysis, Derivatives Modeling, and Trading
  104.  *              Strategies in the Presence of Counter-party Credit Risk for the Fixed Income Market</i>
  105.  *              <b>World Scientific Publishing</b> Singapore
  106.  *      </li>
  107.  *      <li>
  108.  *          Piterbarg, V. (2010): Funding Beyond Discounting: Collateral Agreements and Derivatives Pricing
  109.  *              <i>Risk</i> <b>21 (2)</b> 97-102
  110.  *      </li>
  111.  *  </ul>
  112.  *  
  113.  * <br><br>
  114.  *  <ul>
  115.  *      <li><b>Module </b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/PortfolioCore.md">Portfolio Core Module</a></li>
  116.  *      <li><b>Library</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/XVAAnalyticsLibrary.md">XVA Analytics Library</a></li>
  117.  *      <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>
  118.  *      <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>
  119.  *  </ul>
  120.  * <br><br>
  121.  * 
  122.  * @author Lakshmi Krishnamurthy
  123.  */

  125. public class CounterPartyHazardLow {

  127.     private static final void CVA (
  128.         final double dblT,
  129.         final double dblRB,
  130.         final double dblRC,
  131.         final double dblLambdaB,
  132.         final double dblLambdaC)
  133.         throws Exception
  134.     {
  135.         double dblMTM_XVA___Funding_0    = -1. * (1. - Math.exp (-1. * (1. - dblRC) * dblLambdaC * dblT));

  137.         double dblMTM_XVA___Funding_Bank = -1. * (1. - Math.exp (-1. * ((1. - dblRB) * dblLambdaB + (1. - dblRC) * dblLambdaC) * dblT));

  139.         double dblMTM_Fair__Funding_0   = -1. * (1. - dblRC) * dblLambdaC *
  140.             (1. - Math.exp (-1. * (dblLambdaB + dblLambdaC) * dblT)) /
  141.             (dblLambdaB + dblLambdaC);

  143.         double dblMTM_Fair__Funding_Bank = -1. * ((1. - dblRB) * dblLambdaB + (1. - dblRC) * dblLambdaC) *
  144.             (1. - Math.exp (-1. * (dblLambdaB + dblLambdaC) * dblT)) /
  145.             (dblLambdaB + dblLambdaC);

  147.         System.out.println ("\t|| " +
  148.             FormatUtil.FormatDouble (dblLambdaB   , 1, 1, 100.) + "% => " +
  149.             FormatUtil.FormatDouble (dblMTM_XVA___Funding_0   , 2, 2, 100.) + "% | " +
  150.             FormatUtil.FormatDouble (dblMTM_XVA___Funding_Bank, 2, 2, 100.) + "% | " +
  151.             FormatUtil.FormatDouble (dblMTM_Fair__Funding_0   , 2, 2, 100.) + "% | " +
  152.             FormatUtil.FormatDouble (dblMTM_Fair__Funding_Bank, 2, 2, 100.) + "% ||"
  153.         );
  154.     }

  156.     public static final void main (
  157.         final String[] astrArgs)
  158.         throws Exception
  159.     {
  160.         EnvManager.InitEnv ("");

  162.         double dblLambdaC = 0.00;

  164.         double dblRB = 0.4;
  165.         double dblRC = 0.4;
  166.         double dblT = 5.;

  168.         double[] adblLambdaB = new double[] {
  169.             0.00001,
  170.             0.005,
  171.             0.01,
  172.             0.015,
  173.             0.02,
  174.             0.025,
  175.             0.03,
  176.             0.035,
  177.             0.04,
  178.             0.045,
  179.             0.05
  180.         };

  182.         System.out.println();

  184.         System.out.println ("\t||--------------------------------------------------||");

  186.         System.out.println ("\t||        CVA UNDER LOW COUNTER PARTY HAZARD        ||");

  188.         System.out.println ("\t||--------------------------------------------------||");

  190.         System.out.println ("\t|| L -> R:                                          ||");

  192.         System.out.println ("\t||        - Close Out      => MTM XVA               ||");

  194.         System.out.println ("\t||        - Funding Spread => None                  ||");

  196.         System.out.println ("\t||        - Close Out      => MTM Fair Value        ||");

  198.         System.out.println ("\t||        - Funding Spread => Bank                  ||");

  200.         System.out.println ("\t||--------------------------------------------------||");

  202.         for (double dblLambdaB : adblLambdaB)
  203.             CVA (
  204.                 dblT,
  205.                 dblRB,
  206.                 dblRC,
  207.                 dblLambdaB,
  208.                 dblLambdaC
  209.             );

  211.         System.out.println ("\t||--------------------------------------------------||");

  213.         System.out.println();

  215.         EnvManager.TerminateEnv();
  216.     }
  217. }
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