CDSPayerReceiverAnalysis.java
package org.drip.sample.creditoption;
import java.util.Map;
import org.drip.analytics.date.*;
import org.drip.market.otc.*;
import org.drip.numerical.common.FormatUtil;
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.FixFloatComponent;
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>CDSPayerReceiverAnalysis</i> carries out a Volatility Analysis of Payer/Receiver CDS European Option.
*
* <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 CDSPayerReceiverAnalysis {
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
*/
System.out.println ("\n\t|------------------------||");
for (int i = 0; i < aCDS.length; ++i)
System.out.println (
"\t| " + aCDS[i].name() + " =" +
FormatUtil.FormatDouble (aCDS[i].measureValue (
valParams, pricerParams, MarketParamsBuilder.Create (
dcFunding,
null,
null,
cc,
null,
null,
null,
null
),
null,
astrCalibMeasure[i]
), 1, 1, 1.) + " ||"
);
System.out.println ("\t|------------------------||");
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[] adblFairPremiumVolatility = new double[] {
0.10,
0.15,
0.20,
0.25,
0.30,
0.35,
0.40,
0.45,
0.50
};
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();
Map<String, Double> mapCDSForwardOutput = cdsForward.value (
valParams,
pricerParams,
csqc,
null
);
double dblStrike = 1.005 * 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
);
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
);
System.out.println ("\n\t||-------------------------------------------------------------------||----------------------------------------------------------|||");
System.out.println ("\t|| |||");
System.out.println ("\t|| CDS Payer Receiver Option Analysis |||");
System.out.println ("\t|| --- ----- -------- ------ -------- |||");
System.out.println ("\t|| L -> R: |||");
System.out.println ("\t|| Forward CDS Fair Premium Log-normal Volatility |||");
System.out.println ("\t|| Receiver ATM Fair Premium (bp) |||");
System.out.println ("\t|| Receiver Clean DV01 |||");
System.out.println ("\t|| Receiver Manifest Measure Intrinsic |||");
System.out.println ("\t|| Receiver Manifest Measure Intrinsic Value |||");
System.out.println ("\t|| Receiver Moneyness Factor |||");
System.out.println ("\t|| Receiver Option Price |||");
System.out.println ("\t|| Payer ATM Fair Premium (bp) |||");
System.out.println ("\t|| Payer Clean DV01 |||");
System.out.println ("\t|| Payer Manifest Measure Intrinsic |||");
System.out.println ("\t|| Payer Manifest Measure Intrinsic Value |||");
System.out.println ("\t|| Payer Moneyness Factor |||");
System.out.println ("\t|| Payer Option Price |||");
System.out.println ("\t|| |||");
System.out.println ("\t||-------------------------------------------------------------------||----------------------------------------------------------|||");
for (double dblFairPremiumVolatility : adblFairPremiumVolatility) {
csqc.setCustomVolatility (
ScenarioDeterministicVolatilityBuilder.FlatForward (
dtSpot.julian(),
VolatilityLabel.Standard (CustomLabel.Standard (cdsForward.name() + "_" + strManifestMeasure)),
cdsForward.payCurrency(),
dblFairPremiumVolatility
)
);
Map<String, Double> mapReceiverOptionOutput = cdsOptionReceiver.value (
valParams,
null,
csqc,
null
);
Map<String, Double> mapPayerOptionOutput = cdsOptionPayer.value (
valParams,
null,
csqc,
null
);
System.out.println (
"\t|| " + FormatUtil.FormatDouble (dblFairPremiumVolatility, 2, 1, 100.) + "% => " +
FormatUtil.FormatDouble (mapReceiverOptionOutput.get ("ATMManifestMeasure"), 3, 2, 1.) + " | " +
FormatUtil.FormatDouble (mapReceiverOptionOutput.get ("ManifestMeasurePriceTransformer"), 1, 2, 100.) + " | " +
FormatUtil.FormatDouble (mapReceiverOptionOutput.get ("ManifestMeasureIntrinsic"), 1, 4, 100.) + " | " +
FormatUtil.FormatDouble (mapReceiverOptionOutput.get ("ManifestMeasureIntrinsicValue"), 1, 2, 100.) + " | " +
FormatUtil.FormatDouble (mapReceiverOptionOutput.get ("MoneynessFactor"), 1, 4, 1.) + " | " +
FormatUtil.FormatDouble (mapReceiverOptionOutput.get ("Price"), 1, 4, 1.) + " || " +
FormatUtil.FormatDouble (mapPayerOptionOutput.get ("ATMManifestMeasure"), 3, 2, 1.) + " | " +
FormatUtil.FormatDouble (mapPayerOptionOutput.get ("ManifestMeasurePriceTransformer"), 1, 2, 100.) + " | " +
FormatUtil.FormatDouble (mapPayerOptionOutput.get ("ManifestMeasureIntrinsic"), 1, 4, 100.) + " | " +
FormatUtil.FormatDouble (mapPayerOptionOutput.get ("ManifestMeasureIntrinsicValue"), 1, 2, 100.) + " | " +
FormatUtil.FormatDouble (mapPayerOptionOutput.get ("MoneynessFactor"), 1, 4, 1.) + " | " +
FormatUtil.FormatDouble (mapPayerOptionOutput.get ("Price"), 1, 4, 1.) + " |||"
);
}
System.out.println ("\t||-------------------------------------------------------------------||----------------------------------------------------------|||");
EnvManager.TerminateEnv();
}
}