CDSPayerReceiver.java

package org.drip.sample.creditoption;

import java.util.Map;

import org.drip.analytics.date.*;
import org.drip.market.otc.*;
import org.drip.param.creator.MarketParamsBuilder;
import org.drip.param.market.CurveSurfaceQuoteContainer;
import org.drip.param.pricer.CreditPricerParams;
import org.drip.param.valuation.ValuationParams;
import org.drip.pricer.option.BlackScholesAlgorithm;
import org.drip.product.creator.*;
import org.drip.product.definition.*;
import org.drip.product.option.CDSEuropeanOption;
import org.drip.product.params.LastTradingDateSetting;
import org.drip.product.rates.*;
import org.drip.service.env.EnvManager;
import org.drip.state.creator.*;
import org.drip.state.credit.CreditCurve;
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
 * 
 *  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>CDSPayerReceiver</i> contains the Demonstration of Valuing a Payer/Receiver CDS European Option Sample.
 *  
 * <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/creditoption/README.md">CDS Single Name Index Option</a></li>
 *  </ul>
 * <br><br>
 * 
 * @author Lakshmi Krishnamurthy
 */

public class CDSPayerReceiver {

	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.
		);
	}

	/*
	 * Construct the Array of Deposit Instruments from the given set of parameters
	 * 
	 *  	USE WITH CARE: This sample ignores errors and does not handle exceptions.
	 */

	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;
	}

	/*
	 * Construct the Array of Swap Instruments from the given set of parameters
	 * 
	 *  	USE WITH CARE: This sample ignores errors and does not handle exceptions.
	 */

	private static final CalibratableComponent[] 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;
	}

	/*
	 * Construct the discount curve using the following steps:
	 * 	- Construct the array of cash instruments and their quotes.
	 * 	- Construct the array of swap instruments and their quotes.
	 * 	- Construct a shape preserving and smoothing KLK Hyperbolic Spline from the cash/swap instruments.
	 * 
	 *  	USE WITH CARE: This sample ignores errors and does not handle exceptions.
	 */

	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[] {
				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"
		};

		/*
		 * Construct the array of Swap instruments and their quotes.
		 */

		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
		);

		/*
		 * 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,
				"USD"
			),
			aDepositComp,
			adblDepositQuote,
			astrDepositManifestMeasure,
			aSwapComp,
			adblSwapQuote,
			astrSwapManifestMeasure,
			false
		);
	}

	/*
	 * Sample API demonstrating the creation of the Credit Curve from the CDS instruments
	 * 
	 *  	USE WITH CARE: This sample ignores errors and does not handle exceptions.
	 */

	private static CreditCurve MakeCC (
		final JulianDate dtSpot,
		final String strCreditCurve,
		final MergedDiscountForwardCurve dcFunding)
		throws Exception
	{
		/*
		 * Populate the instruments, the calibration measures, and the calibration quotes
		 */

		double[] adblQuotes = new double[5];
		String[] astrCalibMeasure = new String[5];
		CreditDefaultSwap[] aCDS = new CreditDefaultSwap[5];

		for (int i = 0; i < 5; ++i) {

			/*
			 * The Calibration CDS
			 */

			aCDS[i] = CDSBuilder.CreateSNAC (
				dtSpot,
				(i + 1) + "Y",
				0.01,
				strCreditCurve
			);

			/*
			 * Calibration Quote
			 */

			adblQuotes[i] = 100.;

			/*
			 * Calibration Measure
			 */

			astrCalibMeasure[i] = "FairPremium";
		}

		/*
		 * Create the Credit Curve from the give CDS instruments
		 */

		CreditCurve cc = ScenarioCreditCurveBuilder.Custom (
			strCreditCurve,
			dtSpot,
			aCDS,
			dcFunding,
			adblQuotes,
			astrCalibMeasure,
			0.4,
			false
		);

		/*
		 * Valuation Parameters
		 */

		ValuationParams valParams = ValuationParams.Spot (dtSpot.julian());

		/*
		 * Standard Credit Pricer Parameters (check javadoc for details)
		 */

		CreditPricerParams pricerParams = CreditPricerParams.Standard();

		/*
		 * Re-calculate the input calibration measures for the input CDSes
		 */

		for (int i = 0; i < aCDS.length; ++i)
			System.out.println (
				"\t" + astrCalibMeasure[i] + "[" + i + "] = " +
				aCDS[i].measureValue (
					valParams, pricerParams, MarketParamsBuilder.Create (
						dcFunding,
						null,
						null,
						cc,
						null,
						null,
						null,
						null
					),
					null,
					astrCalibMeasure[i]
				)
			);

		return cc;
	}

	/*
	 * Sample API demonstrating the display of the CDS coupon and loss cash flow
	 * 
	 *  	USE WITH CARE: This sample ignores errors and does not handle exceptions.
	 */

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

		JulianDate dtSpot = DateUtil.Today();

		String strCurrency = "USD";
		String strCreditCurve = "DB";
		String strCDSForwardStartTenor = "3M";
		String strCDSMaturityTenor = "5Y";
		double dblCDSCoupon = 0.1;
		String strManifestMeasure = "FairPremium";
		double dblFairPremiumVolatility = 0.4;

		MergedDiscountForwardCurve dcFunding = MakeDC (
			dtSpot,
			strCurrency
		);

		CreditCurve cc = MakeCC (
			dtSpot,
			strCreditCurve,
			dcFunding
		);

		CurveSurfaceQuoteContainer csqc = MarketParamsBuilder.Credit (
			dcFunding,
			cc
		);

		CreditDefaultSwap cdsForward = CDSBuilder.CreateSNAC (
			dtSpot.addTenor (strCDSForwardStartTenor),
			strCDSMaturityTenor,
			dblCDSCoupon,
			strCreditCurve
		);

		ValuationParams valParams = ValuationParams.Spot (dtSpot.julian());

		CreditPricerParams pricerParams = CreditPricerParams.Standard();

		csqc.setCustomVolatility (
			ScenarioDeterministicVolatilityBuilder.FlatForward (
				dtSpot.julian(),
				VolatilityLabel.Standard (CustomLabel.Standard (cdsForward.name() + "_" + strManifestMeasure)),
				strCurrency,
				dblFairPremiumVolatility
			)
		);

		Map<String, Double> mapCDSForwardOutput = cdsForward.value (
			valParams,
			pricerParams,
			csqc,
			null
		);

		double dblStrike = 1.01 * mapCDSForwardOutput.get (strManifestMeasure);

		CDSEuropeanOption cdsOptionReceiver = new CDSEuropeanOption (
			cdsForward.name() + "::RECEIVER_OPT",
			cdsForward,
			strManifestMeasure,
			true,
			dblStrike,
			new LastTradingDateSetting (
				LastTradingDateSetting.MID_CURVE_OPTION_QUARTERLY,
				"",
				Integer.MIN_VALUE
			),
			new BlackScholesAlgorithm(),
			null
		);

		Map<String, Double> mapReceiverOptionOutput = cdsOptionReceiver.value (
			valParams,
			null,
			csqc,
			null
		);

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

		for (Map.Entry<String, Double> me : mapReceiverOptionOutput.entrySet())
			System.out.println ("\t" + me.getKey() + " => " + me.getValue());

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

		CDSEuropeanOption cdsOptionPayer = new CDSEuropeanOption (
			cdsForward.name() + "::PAYER_OPT",
			cdsForward,
			strManifestMeasure,
			false,
			dblStrike,
			new LastTradingDateSetting (
				LastTradingDateSetting.MID_CURVE_OPTION_QUARTERLY,
				"",
				Integer.MIN_VALUE
			),
			new BlackScholesAlgorithm(),
			null
		);

		Map<String, Double> mapPayerOptionOutput = cdsOptionPayer.value (
			valParams,
			null,
			csqc,
			null
		);

		for (Map.Entry<String, Double> me : mapPayerOptionOutput.entrySet())
			System.out.println ("\t" + me.getKey() + " => " + me.getValue());

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

		EnvManager.TerminateEnv();
	}
}