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();
    }
}