FRAStdCapModels.java
package org.drip.sample.capfloor;
import java.util.*;
import org.drip.analytics.date.*;
import org.drip.analytics.support.CompositePeriodBuilder;
import org.drip.market.otc.*;
import org.drip.numerical.common.FormatUtil;
import org.drip.param.creator.*;
import org.drip.param.market.CurveSurfaceQuoteContainer;
import org.drip.param.period.*;
import org.drip.param.valuation.ValuationParams;
import org.drip.pricer.option.*;
import org.drip.product.creator.SingleStreamComponentBuilder;
import org.drip.product.definition.CalibratableComponent;
import org.drip.product.fra.FRAStandardCapFloor;
import org.drip.product.params.LastTradingDateSetting;
import org.drip.product.rates.*;
import org.drip.service.env.EnvManager;
import org.drip.state.creator.ScenarioDiscountCurveBuilder;
import org.drip.state.discount.*;
import org.drip.state.forward.ForwardCurve;
import org.drip.state.identifier.ForwardLabel;
/*
* -*- 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
*
* 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>FRAStdCapModels</i> runs a side-by-side comparison of the FRA Cap sequence using different models.
*
* <br><br>
* <ul>
* <li>
* Brace, A., D. Gatarek, and M. Musiela (1997): The Market Model of Interest Rate Dynamics
* <i>Mathematical Finance</i> <b>7 (2)</b> 127-155
* </li>
* </ul>
*
* <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/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/capfloor/README.md">FRA Standard Cap Floor Valuation</a></li>
* </ul>
* <br><br>
*
* @author Lakshmi Krishnamurthy
*/
public class FRAStdCapModels {
private static final FixFloatComponent OTCFixFloat (
final JulianDate dtSpot,
final String strCurrency,
final String strMaturityTenor,
final double dblCoupon)
{
FixedFloatSwapConvention ffConv = IBORFixedFloatContainer.ConventionFromJurisdiction (
strCurrency,
"ALL",
strMaturityTenor,
"MAIN"
);
return ffConv.createFixFloatComponent (
dtSpot,
strMaturityTenor,
dblCoupon,
0.,
1.
);
}
private static final CalibratableComponent[] DepositInstrumentsFromMaturityDays (
final JulianDate dtEffective,
final int[] aiDay,
final int iNumFuture,
final String strCurrency)
throws Exception
{
CalibratableComponent[] aCalibComp = new CalibratableComponent[aiDay.length + iNumFuture];
for (int i = 0; i < aiDay.length; ++i)
aCalibComp[i] = SingleStreamComponentBuilder.Deposit (
dtEffective,
dtEffective.addBusDays (
aiDay[i],
strCurrency
),
ForwardLabel.Create (
strCurrency,
"3M"
)
);
CalibratableComponent[] aEDF = SingleStreamComponentBuilder.ForwardRateFuturesPack (
dtEffective,
iNumFuture,
strCurrency
);
for (int i = aiDay.length; i < aiDay.length + iNumFuture; ++i)
aCalibComp[i] = aEDF[i - aiDay.length];
return aCalibComp;
}
private static final FixFloatComponent[] SwapInstrumentsFromMaturityTenor (
final JulianDate dtSpot,
final String strCurrency,
final String[] astrMaturityTenor,
final double[] adblCoupon)
throws Exception
{
FixFloatComponent[] aIRS = new FixFloatComponent[astrMaturityTenor.length];
for (int i = 0; i < astrMaturityTenor.length; ++i)
aIRS[i] = OTCFixFloat (
dtSpot,
strCurrency,
astrMaturityTenor[i],
adblCoupon[i]
);
return aIRS;
}
private static final MergedDiscountForwardCurve MakeDC (
final JulianDate dtSpot,
final String strCurrency)
throws Exception
{
/*
* Construct the array of Deposit instruments and their quotes.
*/
CalibratableComponent[] aDepositComp = DepositInstrumentsFromMaturityDays (
dtSpot,
new int[] {
30,
60,
91,
182,
273
},
0,
strCurrency
);
double[] adblDepositQuote = new double[] {
0.0668750, // 30D
0.0675000, // 60D
0.0678125, // 91D
0.0712500, // 182D
0.0750000 // 273D
};
String[] astrDepositManifestMeasure = new String[] {
"ForwardRate", // 30D
"ForwardRate", // 60D
"ForwardRate", // 91D
"ForwardRate", // 182D
"ForwardRate" // 273D
};
/*
* Construct the array of Swap instruments and their quotes.
*/
double[] adblSwapQuote = new double[] {
0.08265, // 2Y
0.08550, // 3Y
0.08655, // 4Y
0.08770, // 5Y
0.08910, // 7Y
0.08920 // 10Y
};
String[] astrSwapManifestMeasure = new String[] {
"SwapRate", // 2Y
"SwapRate", // 3Y
"SwapRate", // 4Y
"SwapRate", // 5Y
"SwapRate", // 7Y
"SwapRate" // 10Y
};
CalibratableComponent[] aSwapComp = SwapInstrumentsFromMaturityTenor (
dtSpot,
strCurrency,
new java.lang.String[] {
"2Y",
"3Y",
"4Y",
"5Y",
"7Y",
"10Y"
},
adblSwapQuote
);
/*
* Construct a shape preserving and smoothing KLK Hyperbolic Spline from the cash/swap instruments.
*/
return ScenarioDiscountCurveBuilder.CubicKLKHyperbolicDFRateShapePreserver (
"KLK_HYPERBOLIC_SHAPE_TEMPLATE",
new ValuationParams (
dtSpot,
dtSpot,
strCurrency
),
aDepositComp,
adblDepositQuote,
astrDepositManifestMeasure,
aSwapComp,
adblSwapQuote,
astrSwapManifestMeasure,
false
);
}
private static final FRAStandardCapFloor MakeCap (
final JulianDate dtEffective,
final ForwardLabel fri,
final String strMaturityTenor,
final String strManifestMeasure,
final double dblStrike,
final FokkerPlanckGenerator fpg)
throws Exception
{
ComposableFloatingUnitSetting cfus = new ComposableFloatingUnitSetting (
fri.tenor(),
CompositePeriodBuilder.EDGE_DATE_SEQUENCE_SINGLE,
null,
fri,
CompositePeriodBuilder.REFERENCE_PERIOD_IN_ADVANCE,
0.
);
CompositePeriodSetting cps = new CompositePeriodSetting (
4,
fri.tenor(),
fri.currency(),
null,
1.,
null,
null,
null,
null
);
Stream floatStream = new Stream (
CompositePeriodBuilder.FloatingCompositeUnit (
CompositePeriodBuilder.RegularEdgeDates (
dtEffective.julian(),
fri.tenor(),
strMaturityTenor,
null
),
cps,
cfus
)
);
return new FRAStandardCapFloor (
"FRA_CAP",
floatStream,
strManifestMeasure,
true,
dblStrike,
new LastTradingDateSetting (
LastTradingDateSetting.MID_CURVE_OPTION_QUARTERLY,
"",
Integer.MIN_VALUE
),
null,
fpg
);
}
private static final Map<JulianDate, Double> ValueCap (
final ForwardLabel fri,
final String strManifestMeasure,
final ValuationParams valParams,
final CurveSurfaceQuoteContainer mktParams,
final String[] astrMaturityTenor,
final double[] adblATMStrike,
final double[] adblATMVol,
final FokkerPlanckGenerator fpg)
throws Exception
{
Map<JulianDate, Double> mapDateVol = new TreeMap<JulianDate, Double>();
for (int i = 0; i < astrMaturityTenor.length; ++i) {
FRAStandardCapFloor cap = MakeCap (
new JulianDate (valParams.valueDate()),
fri,
astrMaturityTenor[i],
strManifestMeasure,
adblATMStrike[i],
fpg
);
Map<String, Double> mapCapStreamOutput = cap.stream().value (
valParams,
null,
mktParams,
null
);
double dblCapStreamFairPremium = mapCapStreamOutput.get ("FairPremium");
FixFloatComponent swap = OTCFixFloat (
new JulianDate (valParams.valueDate()),
fri.currency(),
astrMaturityTenor[i],
0.
);
Map<String, Double> mapSwapOutput = swap.value (
valParams,
null,
mktParams,
null
);
double dblSwapRate = mapSwapOutput.get ("FairPremium");
double dblCapPrice = cap.priceFromFlatVolatility (
valParams,
null,
mktParams,
null,
adblATMVol[i]
);
cap.stripPiecewiseForwardVolatility (
valParams,
null,
mktParams,
null,
adblATMVol[i],
mapDateVol
);
System.out.println (
"\tCap " + cap.maturityDate() + " | " +
FormatUtil.FormatDouble (dblCapStreamFairPremium, 1, 2, 100.) + "% |" +
FormatUtil.FormatDouble (dblSwapRate, 1, 2, 100.) + "% |" +
FormatUtil.FormatDouble (cap.strike(), 1, 2, 100.) + "% |" +
FormatUtil.FormatDouble (adblATMVol[i], 2, 2, 100.) + "% |" +
FormatUtil.FormatDouble (dblCapPrice, 1, 0, 10000.) + " ||"
);
}
return mapDateVol;
}
public static final void main (
final String[] astrArgs)
throws Exception
{
EnvManager.InitEnv ("");
JulianDate dtSpot = DateUtil.CreateFromYMD (
1995,
DateUtil.FEBRUARY,
3
);
String strFRATenor = "3M";
String strCurrency = "GBP";
String strManifestMeasure = "ParForward";
ForwardLabel fri = ForwardLabel.Create (
strCurrency,
strFRATenor
);
MergedDiscountForwardCurve dc = MakeDC (
dtSpot,
strCurrency
);
ForwardCurve fcNative = dc.nativeForwardCurve (strFRATenor);
ValuationParams valParams = new ValuationParams (
dtSpot,
dtSpot,
strCurrency
);
CurveSurfaceQuoteContainer mktParams = MarketParamsBuilder.Create (
dc,
fcNative,
null,
null,
null,
null,
null,
null
);
String[] astrMaturityTenor = new String[] {
"1Y",
"2Y",
"3Y",
"4Y",
"5Y",
"7Y",
"10Y"
};
double[] adblATMStrike = new double[] {
0.0788, // "1Y",
0.0839, // "2Y",
0.0864, // "3Y",
0.0869, // "4Y",
0.0879, // "5Y",
0.0890, // "7Y",
0.0889 // "10Y"
};
double[] adblATMVol = new double[] {
0.1550, // "1Y",
0.1775, // "2Y",
0.1800, // "3Y",
0.1775, // "4Y",
0.1775, // "5Y",
0.1650, // "7Y",
0.1550 // "10Y"
};
System.out.println ("\t---------------------------------------------------");
System.out.println ("\t---------------------------------------------------");
Map<JulianDate, Double> mapLognormalDateVol = ValueCap (
fri,
strManifestMeasure,
valParams,
mktParams,
astrMaturityTenor,
adblATMStrike,
adblATMVol,
new BlackScholesAlgorithm()
);
System.out.println ("\t---------------------------------------------------");
System.out.println ("\t---------------------------------------------------");
Map<JulianDate, Double> mapNormalDateVol = ValueCap (
fri,
strManifestMeasure,
valParams,
mktParams,
astrMaturityTenor,
adblATMStrike,
adblATMVol,
new BlackNormalAlgorithm()
);
System.out.println ("\n\n\t---------------------------------------------------");
System.out.println ("\t----- CALIBRATED FORWARD VOLATILITY NODES --------");
System.out.println ("\t---------------------------------------------------\n");
for (Map.Entry<JulianDate, Double> me : mapLognormalDateVol.entrySet())
System.out.println (
"\t" +
me.getKey() + " => " +
FormatUtil.FormatDouble (me.getValue(), 2, 2, 100.) + "% |" +
FormatUtil.FormatDouble (mapNormalDateVol.get (me.getKey()), 2, 2, 100.) + "% ||"
);
System.out.println ("\t---------------------------------------------------");
System.out.println ("\t---------------------------------------------------");
EnvManager.TerminateEnv();
}
}