FRAStdCapSequence.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.BlackScholesAlgorithm;
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>FRAStdCapSequence</i> demonstrates the Product Creation, Market Parameters Construction, and Valuation
 * of a Sequence of Standard FRA Caps. The Marks and the Valuation References are sourced from the reference
 * below.
 * 
 * <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 FRAStdCapSequence {

    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)
        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,
            new BlackScholesAlgorithm()
        );
    }

    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"
        };

        Map<JulianDate, Double> mapDateVol = new TreeMap<JulianDate, Double>();

        for (int i = 0; i < astrMaturityTenor.length; ++i) {
            FRAStandardCapFloor cap = MakeCap (
                dtSpot,
                fri,
                astrMaturityTenor[i],
                strManifestMeasure,
                adblATMStrike[i]
            );

            Map<String, Double> mapCapStreamOutput = cap.stream().value (
                valParams,
                null,
                mktParams,
                null
            );

            double dblCapStreamFairPremium = mapCapStreamOutput.get ("FairPremium");

            FixFloatComponent swap = OTCFixFloat (
                dtSpot,
                strCurrency,
                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.) + " ||"
            );
        }

        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 : mapDateVol.entrySet())
            System.out.println (
                "\t" +
                me.getKey() + " => " +
                FormatUtil.FormatDouble (me.getValue(), 2, 2, 100.) + "%  ||"
            );

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

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

        double[] adblATMPrice = new double[] {
            0.0027, //  "1Y",
            0.0100, //  "2Y",
            0.0185, //  "3Y",
            0.0267, //  "4Y",
            0.0360, //  "5Y",
            0.0511, //  "7Y",
            0.0703  // "10Y"
        };

        for (int i = 0; i < astrMaturityTenor.length; ++i) {
            FRAStandardCapFloor cap = MakeCap (
                dtSpot,
                fri,
                astrMaturityTenor[i],
                strManifestMeasure,
                adblATMStrike[i]
            );

            double dblATMVolatility = cap.volatilityFromATMPrice (
                valParams,
                null,
                mktParams,
                null,
                adblATMPrice[i]
            );

            Map<String, Double> mapCapStreamOutput = cap.stream().value (
                valParams,
                null,
                mktParams,
                null
            );

            double dblCapStreamFairPremium = mapCapStreamOutput.get ("FairPremium");

            System.out.println (
                "\tCap ATM Volatility  " + cap.maturityDate() + " | " +
                FormatUtil.FormatDouble (adblATMPrice[i], 2, 2, 100.) + "% |" +
                FormatUtil.FormatDouble (dblCapStreamFairPremium, 2, 2, 100.) + "% |" +
                FormatUtil.FormatDouble (dblATMVolatility, 2, 2, 100.) + "% ||"
            );
        }

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

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

        EnvManager.TerminateEnv();
    }
}