FixFloatVarianceAnalysis.java

package org.drip.sample.cms;

import java.util.List;

import org.drip.analytics.date.*;
import org.drip.analytics.support.*;
import org.drip.function.r1tor1.FlatUnivariate;
import org.drip.market.otc.*;
import org.drip.numerical.common.FormatUtil;
import org.drip.param.market.CurveSurfaceQuoteContainer;
import org.drip.param.period.*;
import org.drip.param.valuation.*;
import org.drip.product.creator.SingleStreamComponentBuilder;
import org.drip.product.definition.CalibratableComponent;
import org.drip.product.rates.*;
import org.drip.service.env.EnvManager;
import org.drip.state.creator.*;
import org.drip.state.discount.MergedDiscountForwardCurve;
import org.drip.state.identifier.*;

/*
 * -*- 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>FixFloatVarianceAnalysis</i> demonstrates the Construction and Valuation Impact of Volatility and
 * Correlation on the CMS Fix-Float Swap.
 *  
 * <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/cms/README.md">Dual Stream Constant Maturity Swap</a></li>
 *  </ul>
 * <br><br>
 * 
 * @author Lakshmi Krishnamurthy
 */

public class FixFloatVarianceAnalysis {

    private static final FixFloatComponent OTCIRS (
        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 iNumFutures,
        final String strCurrency)
        throws Exception
    {
        CalibratableComponent[] aCalibComp = new CalibratableComponent[aiDay.length + iNumFutures];

        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,
            iNumFutures,
            strCurrency
        );

        for (int i = aiDay.length; i < aiDay.length + iNumFutures; ++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) {
            FixFloatComponent irs = OTCIRS (
                dtSpot,
                strCurrency,
                astrMaturityTenor[i],
                adblCoupon[i]
            );

            irs.setPrimaryCode ("IRS." + astrMaturityTenor[i] + "." + strCurrency);

            aIRS[i] = irs;
        }

        return aIRS;
    }

    private static final MergedDiscountForwardCurve MakeDC (
        final JulianDate dtSpot,
        final String strCurrency)
        throws Exception
    {

        CalibratableComponent[] aDepositComp = DepositInstrumentsFromMaturityDays (
            dtSpot,
            new int[] {
                1, 2, 3, 7, 14, 21, 30, 60
            },
            0,
            strCurrency
        );

        double[] adblDepositQuote = new double[] {
            0.01200, 0.01200, 0.01200, 0.01450, 0.01550, 0.01600, 0.01660, 0.01850
        };

        String[] astrDepositManifestMeasure = new String[] {
            "ForwardRate", "ForwardRate", "ForwardRate", "ForwardRate", "ForwardRate", "ForwardRate", "ForwardRate", "ForwardRate"
        };

        double[] adblSwapQuote = new double[] {
            0.02604,    //  4Y
            0.02808,    //  5Y
            0.02983,    //  6Y
            0.03136,    //  7Y
            0.03268,    //  8Y
            0.03383,    //  9Y
            0.03488,    // 10Y
            0.03583,    // 11Y
            0.03668,    // 12Y
            0.03833,    // 15Y
            0.03854,    // 20Y
            0.03672,    // 25Y
            0.03510,    // 30Y
            0.03266,    // 40Y
            0.03145     // 50Y
        };

        String[] astrSwapManifestMeasure = new String[] {
            "SwapRate",    //  4Y
            "SwapRate",    //  5Y
            "SwapRate",    //  6Y
            "SwapRate",    //  7Y
            "SwapRate",    //  8Y
            "SwapRate",    //  9Y
            "SwapRate",    // 10Y
            "SwapRate",    // 11Y
            "SwapRate",    // 12Y
            "SwapRate",    // 15Y
            "SwapRate",    // 20Y
            "SwapRate",    // 25Y
            "SwapRate",    // 30Y
            "SwapRate",    // 40Y
            "SwapRate"     // 50Y
        };

        CalibratableComponent[] aSwapComp = SwapInstrumentsFromMaturityTenor (
            dtSpot,
            strCurrency,
            new java.lang.String[] {
                "4Y", "5Y", "6Y", "7Y", "8Y", "9Y", "10Y", "11Y", "12Y", "15Y", "20Y", "25Y", "30Y", "40Y", "50Y"
            },
            adblSwapQuote
        );

        return ScenarioDiscountCurveBuilder.CubicKLKHyperbolicDFRateShapePreserver (
            "KLK_HYPERBOLIC_SHAPE_TEMPLATE",
            new ValuationParams (
                dtSpot,
                dtSpot,
                strCurrency
            ),
            aDepositComp,
            adblDepositQuote,
            astrDepositManifestMeasure,
            aSwapComp,
            adblSwapQuote,
            astrSwapManifestMeasure,
            true
        );
    }

    private static final FixFloatComponent MakeFixFloatSwap (
        final JulianDate dtEffective,
        final String strCurrency,
        final ForwardLabel forwardLabel,
        final String strMaturityTenor,
        final boolean bInArrears)
        throws Exception
    {
        UnitCouponAccrualSetting ucasFixed = new UnitCouponAccrualSetting (
            4,
            "Act/360",
            false,
            "Act/360",
            false,
            strCurrency,
            false,
            CompositePeriodBuilder.ACCRUAL_COMPOUNDING_RULE_GEOMETRIC
        );

        ComposableFixedUnitSetting cfusFixed = new ComposableFixedUnitSetting (
            "3M",
            CompositePeriodBuilder.EDGE_DATE_SEQUENCE_REGULAR,
            null,
            0.02,
            0.,
            strCurrency
        );

        CompositePeriodSetting cpsFixed = new CompositePeriodSetting (
            4,
            "3M",
            strCurrency,
            null,
            1.,
            null,
            null,
            null,
            null
        );

        ComposableFloatingUnitSetting cfusFloating = new ComposableFloatingUnitSetting (
            "3M",
            CompositePeriodBuilder.EDGE_DATE_SEQUENCE_REGULAR,
            null,
            forwardLabel,
            bInArrears ? CompositePeriodBuilder.REFERENCE_PERIOD_IN_ARREARS : CompositePeriodBuilder.REFERENCE_PERIOD_IN_ADVANCE,
            0.
        );

        CompositePeriodSetting cpsFloating = new CompositePeriodSetting (
            4,
            "3M",
            strCurrency,
            null,
            -1.,
            null,
            null,
            null,
            null
        );

        List<Integer> lsFixedStreamEdgeDate = CompositePeriodBuilder.RegularEdgeDates (
            dtEffective,
            "3M",
            strMaturityTenor,
            null
        );

        List<Integer> lsFloatingStreamEdgeDate = CompositePeriodBuilder.RegularEdgeDates (
            dtEffective,
            "3M",
            strMaturityTenor,
            null
        );

        Stream floatingStream = new Stream (
            CompositePeriodBuilder.FloatingCompositeUnit (
                lsFloatingStreamEdgeDate,
                cpsFloating,
                cfusFloating
            )
        );

        Stream fixedStream = new Stream (
            CompositePeriodBuilder.FixedCompositeUnit (
                lsFixedStreamEdgeDate,
                cpsFixed,
                ucasFixed,
                cfusFixed
            )
        );

        FixFloatComponent fixFloat = new FixFloatComponent (
            fixedStream,
            floatingStream,
            new CashSettleParams (
                0,
                strCurrency,
                0
            )
        );

        return fixFloat;
    }

    private static final void SetMarketParams (
        final int iValueDate,
        final CurveSurfaceQuoteContainer mktParams,
        final ForwardLabel forwardLabel,
        final FundingLabel fundingLabel,
        final double dblFundingVol,
        final double dblForwardVol,
        final double dblForwardFundingCorr)
        throws Exception
    {
        mktParams.setForwardVolatility (
            ScenarioDeterministicVolatilityBuilder.FlatForward (
                iValueDate,
                VolatilityLabel.Standard (forwardLabel),
                forwardLabel.currency(),
                dblForwardVol
            )
        );

        mktParams.setFundingVolatility (
            ScenarioDeterministicVolatilityBuilder.FlatForward (
                iValueDate,
                VolatilityLabel.Standard (fundingLabel),
                forwardLabel.currency(),
                dblFundingVol
            )
        );

        mktParams.setForwardFundingCorrelation (
            forwardLabel,
            fundingLabel,
            new FlatUnivariate (dblForwardFundingCorr)
        );
    }

    private static final void VolCorrScenario (
        final FixFloatComponent[] aCMSFixFloat,
        final ValuationParams valParams,
        final CurveSurfaceQuoteContainer mktParams,
        final ForwardLabel forwardLabel,
        final FundingLabel fundingLabel,
        final double dblForwardVol,
        final double dblFundingVol,
        final double dblForwardFundingCorr,
        final double dblBaseFairPremium)
        throws Exception
    {
        SetMarketParams (
            valParams.valueDate(),
            mktParams,
            forwardLabel,
            fundingLabel,
            dblForwardVol,
            dblFundingVol,
            dblForwardFundingCorr
        );

        String strDump = "\t[" +
            FormatUtil.FormatDouble (dblForwardVol, 2, 0, 100.) + "%," +
            FormatUtil.FormatDouble (dblFundingVol, 2, 0, 100.) + "%," +
            FormatUtil.FormatDouble (dblForwardFundingCorr, 2, 0, 100.) + "%] = ";

        for (int i = 0; i < aCMSFixFloat.length; ++i) {
            CaseInsensitiveTreeMap<Double> mapOutput = aCMSFixFloat[i].value (
                valParams,
                null,
                mktParams,
                null
            );

            if (0 != i) strDump += " || ";

            double dblFairPremium = mapOutput.get ("FairPremium");

            strDump +=
                FormatUtil.FormatDouble (dblFairPremium, 1, 2, 100.) + "% | " +
                FormatUtil.FormatDouble (dblFairPremium - dblBaseFairPremium, 2, 0, 10000.);
        }

        System.out.println (strDump + " |");
    }

    public static final void main (
        final String[] astrArgs)
        throws Exception
    {
        EnvManager.InitEnv ("");

        String strTenor = "6M";
        String strCurrency = "USD";
        String strMaturityTenor = "5Y";

        JulianDate dtSpot = DateUtil.CreateFromYMD (
            2012,
            DateUtil.DECEMBER,
            11
        );

        MergedDiscountForwardCurve dc = MakeDC (
            dtSpot,
            strCurrency
        );

        ForwardLabel forwardLabel = ForwardLabel.Create (
            strCurrency,
            strTenor
        );

        CurveSurfaceQuoteContainer mktParams = new CurveSurfaceQuoteContainer();

        mktParams.setFundingState (dc);

        FixFloatComponent cmsInAdvance = MakeFixFloatSwap (
            dtSpot,
            strCurrency,
            forwardLabel,
            strMaturityTenor,
            false
        );

        FixFloatComponent cmsInArrears = MakeFixFloatSwap (
            dtSpot,
            strCurrency,
            forwardLabel,
            strMaturityTenor,
            true
        );

        ValuationParams valParams = new ValuationParams (
            dtSpot,
            dtSpot,
            strCurrency
        );

        double dblBaseFairPremium = cmsInAdvance.value (
            valParams,
            null,
            mktParams,
            null
        ).get ("FairPremium");

        double[] adblForwardVol = new double[] {0.10, 0.30, 0.50};

        double[] adblFundingVol = new double[] {0.10, 0.30, 0.50};

        double[] adblForwardFundingCorr = new double[] {
            -0.10, 0.25
        };

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

        System.out.println ("\t| CMS FIX-FLOAT IN-ADVANCE & IN-ARREARS ANALYSIS|");

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

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

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

        System.out.println ("\t|   Forward State Volatility                    |");

        System.out.println ("\t|   Funding State Volatility                    |");

        System.out.println ("\t|   Forward-Funding Correlation                 |");

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

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

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

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

        System.out.println ("\t|   In Advance Fair Premium (%)                 |");

        System.out.println ("\t|   In Advance Fair Premium Basis (bp)          |");

        System.out.println ("\t|   In Arrears Fair Premium (%)                 |");

        System.out.println ("\t|   In Arrears Fair Premium Basis (bp)          |");

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

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

        for (double dblForwardVol : adblForwardVol) {
            for (double dblFundingVol : adblFundingVol) {
                for (double dblForwardFundingCorr : adblForwardFundingCorr) {
                    VolCorrScenario (
                        new FixFloatComponent[] {
                            cmsInAdvance,
                            cmsInArrears
                        },
                        valParams,
                        mktParams,
                        forwardLabel,
                        FundingLabel.Standard (strCurrency),
                        dblForwardVol,
                        dblFundingVol,
                        dblForwardFundingCorr,
                        dblBaseFairPremium
                    );
                }
            }
        }

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

        EnvManager.TerminateEnv();
    }
}