FedFundOvernightCompounding.java

package org.drip.sample.fedfund;

import java.util.*;

import org.drip.analytics.cashflow.CompositePeriod;
import org.drip.analytics.date.*;
import org.drip.analytics.daycount.Convention;
import org.drip.analytics.output.CompositePeriodCouponMetrics;
import org.drip.analytics.support.*;
import org.drip.function.r1tor1.*;
import org.drip.market.definition.OvernightIndex;
import org.drip.market.otc.*;
import org.drip.param.creator.*;
import org.drip.param.market.*;
import org.drip.param.period.*;
import org.drip.param.valuation.*;
import org.drip.product.creator.*;
import org.drip.product.definition.CalibratableComponent;
import org.drip.product.rates.*;
import org.drip.service.env.EnvManager;
import org.drip.spline.basis.PolynomialFunctionSetParams;
import org.drip.spline.params.*;
import org.drip.spline.stretch.*;
import org.drip.state.creator.*;
import org.drip.state.discount.*;
import org.drip.state.estimator.LatentStateStretchBuilder;
import org.drip.state.identifier.*;
import org.drip.state.inference.*;

/*
 * -*- mode: java; tab-width: 4; indent-tabs-mode: nil; c-basic-offset: 4 -*-
 */

/*!
 * 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
 * Copyright (C) 2014 Lakshmi Krishnamurthy
 * 
 *  This file is part of DROP, an open-source library targeting risk, transaction costs, exposure, margin
 *      calculations, valuation adjustment, and portfolio construction within and across fixed income,
 *      credit, commodity, equity, FX, and structured products.
 *  
 *      https://lakshmidrip.github.io/DROP/
 *  
 *  DROP is composed of three modules:
 *  
 *  - DROP Analytics Core - https://lakshmidrip.github.io/DROP-Analytics-Core/
 *  - DROP Portfolio Core - https://lakshmidrip.github.io/DROP-Portfolio-Core/
 *  - DROP Numerical Core - https://lakshmidrip.github.io/DROP-Numerical-Core/
 * 
 *  DROP Analytics Core implements libraries for the following:
 *  - Fixed Income Analytics
 *  - Asset Backed Analytics
 *  - XVA Analytics
 *  - Exposure and Margin Analytics
 * 
 *  DROP Portfolio Core implements libraries for the following:
 *  - Asset Allocation Analytics
 *  - Transaction Cost Analytics
 * 
 *  DROP Numerical Core implements libraries for the following:
 *  - Statistical Learning
 *  - Numerical Optimizer
 *  - Spline Builder
 *  - Algorithm Support
 * 
 *  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>FedFundOvernightCompounding</i> demonstrates in detail the methodology behind the overnight compounding
 * used in the Overnight fund Floating Stream Accrual.
 *  
 * <br><br>
 *  <ul>
 *      <li><b>Module </b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/AnalyticsCore.md">Analytics Core Module</a></li>
 *      <li><b>Library</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/FixedIncomeAnalyticsLibrary.md">Fixed Income Analytics Library</a></li>
 *      <li><b>Project</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/src/main/java/org/drip/sample/README.md">Sample</a></li>
 *      <li><b>Package</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/src/main/java/org/drip/sample/fedfund/README.md">Fed Fund Analytics</a></li>
 *  </ul>
 * <br><br>
 * 
 * @author Lakshmi Krishnamurthy
 */

public class FedFundOvernightCompounding {

    private static final FixFloatComponent OTCOISFixFloat (
        final JulianDate dtSpot,
        final String strCurrency,
        final String strMaturityTenor,
        final double dblCoupon)
    {
        FixedFloatSwapConvention ffConv = OvernightFixedFloatContainer.FundConventionFromJurisdiction (
            strCurrency
        );

        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 SingleStreamComponent[] DepositInstrumentsFromMaturityDays (
        final JulianDate dtEffective,
        final String strCurrency,
        final int[] aiDay)
        throws Exception
    {
        SingleStreamComponent[] aDeposit = new SingleStreamComponent[aiDay.length];

        for (int i = 0; i < aiDay.length; ++i)
            aDeposit[i] = SingleStreamComponentBuilder.Deposit (
                dtEffective,
                dtEffective.addBusDays (
                    aiDay[i],
                    strCurrency
                ),
                OvernightLabel.Create (
                    strCurrency
                )
            );

        return aDeposit;
    }

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

    private static final FixFloatComponent[] OISFromMaturityTenor (
        final JulianDate dtSpot,
        final String strCurrency,
        final String[] astrMaturityTenor,
        final double[] adblCoupon)
        throws Exception
    {
        FixFloatComponent[] aOIS = new FixFloatComponent[astrMaturityTenor.length];

        for (int i = 0; i < astrMaturityTenor.length; ++i)
            aOIS[i] = OTCOISFixFloat (
                dtSpot,
                strCurrency,
                astrMaturityTenor[i],
                adblCoupon[i]
            );

        return aOIS;
    }

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

    private static final FixFloatComponent[] OISFuturesFromMaturityTenor (
        final JulianDate dtSpot,
        final String strCurrency,
        final String[] astrStartTenor,
        final String[] astrMaturityTenor,
        final double[] adblCoupon)
        throws Exception
    {
        FixFloatComponent[] aOISFutures = new FixFloatComponent[astrMaturityTenor.length];

        for (int i = 0; i < astrMaturityTenor.length; ++i)
            aOISFutures[i] = OTCOISFixFloat (
                dtSpot.addTenor (astrStartTenor[i]),
                strCurrency,
                astrMaturityTenor[i],
                adblCoupon[i]
            );

        return aOISFutures;
    }

    private static final MergedDiscountForwardCurve CustomOISCurveBuilderSample (
        final JulianDate dtSpot,
        final String strCurrency)
        throws Exception
    {
        /*
         * Construct the Array of Deposit Instruments and their Quotes from the given set of parameters
         */

        SingleStreamComponent[] aDepositComp = DepositInstrumentsFromMaturityDays (
            dtSpot,
            strCurrency,
            new int[] {
                1, 2, 3
            }
        );

        double[] adblDepositQuote = new double[] {
            0.0004, 0.0004, 0.0004       // Deposit
        };

        /*
         * Construct the Deposit Instrument Set Stretch Builder
         */

        LatentStateStretchSpec depositStretch = LatentStateStretchBuilder.ForwardFundingStretchSpec (
            "   DEPOSIT   ",
            aDepositComp,
            "ForwardRate",
            adblDepositQuote
        );

        /*
         * Construct the Array of Short End OIS Instruments and their Quotes from the given set of parameters
         */

        double[] adblShortEndOISQuote = new double[] {
            0.00070,    //   1W
            0.00069,    //   2W
            0.00078,    //   3W
            0.00074     //   1M
        };

        CalibratableComponent[] aShortEndOISComp = OISFromMaturityTenor (
            dtSpot,
            strCurrency,
            new java.lang.String[] {
                "1W", "2W", "3W", "1M"
            },
            adblShortEndOISQuote
        );

        /*
         * Construct the Short End OIS Instrument Set Stretch Builder
         */

        LatentStateStretchSpec oisShortEndStretch = LatentStateStretchBuilder.ForwardFundingStretchSpec (
            "SHORT END OIS",
            aShortEndOISComp,
            "SwapRate",
            adblShortEndOISQuote
        );

        /*
         * Construct the Array of OIS Futures Instruments and their Quotes from the given set of parameters
         */

        double[] adblOISFutureQuote = new double[] {
             0.00046,    //   1M x 1M
             0.00016,    //   2M x 1M
            -0.00007,    //   3M x 1M
            -0.00013,    //   4M x 1M
            -0.00014     //   5M x 1M
        };

        CalibratableComponent[] aOISFutureComp = OISFuturesFromMaturityTenor (
            dtSpot,
            strCurrency,
            new java.lang.String[] {
                "1M", "2M", "3M", "4M", "5M"
            },
            new java.lang.String[] {
                "1M", "1M", "1M", "1M", "1M"
            },
            adblOISFutureQuote
        );

        /*
         * Construct the OIS Future Instrument Set Stretch Builder
         */

        LatentStateStretchSpec oisFutureStretch = LatentStateStretchBuilder.ForwardFundingStretchSpec (
            " OIS FUTURE  ",
            aOISFutureComp,
            "SwapRate",
            adblOISFutureQuote
        );

        /*
         * Construct the Array of Long End OIS Instruments and their Quotes from the given set of parameters
         */

        double[] adblLongEndOISQuote = new double[] {
            0.00002,    //  15M
            0.00008,    //  18M
            0.00021,    //  21M
            0.00036,    //   2Y
            0.00127,    //   3Y
            0.00274,    //   4Y
            0.00456,    //   5Y
            0.00647,    //   6Y
            0.00827,    //   7Y
            0.00996,    //   8Y
            0.01147,    //   9Y
            0.01280,    //  10Y
            0.01404,    //  11Y
            0.01516,    //  12Y
            0.01764,    //  15Y
            0.01939,    //  20Y
            0.02003,    //  25Y
            0.02038     //  30Y
        };

        CalibratableComponent[] aLongEndOISComp = OISFromMaturityTenor (
            dtSpot,
            strCurrency,
            new java.lang.String[] {
                "15M", "18M", "21M", "2Y", "3Y", "4Y", "5Y", "6Y", "7Y", "8Y", "9Y", "10Y", "11Y", "12Y", "15Y", "20Y", "25Y", "30Y"
            },
            adblLongEndOISQuote
        );

        /*
         * Construct the Long End OIS Instrument Set Stretch Builder
         */

        LatentStateStretchSpec oisLongEndStretch = LatentStateStretchBuilder.ForwardFundingStretchSpec (
            "LONG END OIS ",
            aLongEndOISComp,
            "SwapRate",
            adblLongEndOISQuote
        );

        LatentStateStretchSpec[] aStretchSpec = new LatentStateStretchSpec[] {
            depositStretch,
            oisShortEndStretch,
            oisFutureStretch,
            oisLongEndStretch
        };

        /*
         * Set up the Linear Curve Calibrator using the following parameters:
         *  - Cubic Exponential Mixture Basis Spline Set
         *  - Ck = 2, Segment Curvature Penalty = 2
         *  - Quadratic Rational Shape Controller
         *  - Natural Boundary Setting
         */

        LinearLatentStateCalibrator lcc = new LinearLatentStateCalibrator (
            new SegmentCustomBuilderControl (
                MultiSegmentSequenceBuilder.BASIS_SPLINE_POLYNOMIAL,
                new PolynomialFunctionSetParams (4),
                SegmentInelasticDesignControl.Create (
                    2,
                    2
                ),
                new ResponseScalingShapeControl (
                    true,
                    new QuadraticRationalShapeControl (0.)
                ),
                null
            ),
            BoundarySettings.NaturalStandard(),
            MultiSegmentSequence.CALIBRATE,
            null,
            null
        );

        /*
         * Construct the Shape Preserving Discount Curve by applying the linear curve calibrator to the array
         *  of Cash and Swap Stretches.
         */

        return ScenarioDiscountCurveBuilder.ShapePreservingDFBuild (
            strCurrency,
            lcc,
            aStretchSpec,
            new ValuationParams (
                dtSpot,
                dtSpot,
                strCurrency
            ),
            null,
            null,
            null,
            1.
        );
    }

    private static final LatentStateFixingsContainer SetFlatOvernightFixings (
        final JulianDate dtStart,
        final JulianDate dtEnd,
        final JulianDate dtValue,
        final ForwardLabel fri,
        final double dblFlatFixing,
        final double dblNotional)
        throws Exception
    {
        LatentStateFixingsContainer lsfc = new LatentStateFixingsContainer();

        double dblAccount = 1.;

        lsfc.add (
            dtStart,
            fri,
            dblFlatFixing
        );

        int iPrevDate = dtStart.julian();

        JulianDate dt = dtStart.addDays (1);

        while (dt.julian() <= dtEnd.julian()) {
            lsfc.add (
                dt,
                fri,
                dblFlatFixing
            );

            if (dt.julian() <= dtValue.julian()) {
                double dblAccrualFraction = Convention.YearFraction (
                    iPrevDate,
                    dt.julian(),
                    "Act/360",
                    false,
                    null,
                    "USD"
                );

                dblAccount *= (1. + dblFlatFixing * dblAccrualFraction);
            }

            iPrevDate = dt.julian();

            dt = dt.addBusDays (
                1,
                "USD"
            );
        }

        System.out.println ("\tManual Calc Float Accrued (Geometric Compounding): " + (dblAccount - 1.) * dblNotional);

        double dblDCF = (dtValue.julian() - dtStart.julian()) / 360.;

        System.out.println ("\tManual Calc Float Accrued (Arithmetic Compounding): " +
            (dblDCF * dblNotional * dblFlatFixing));

        System.out.println ("\tManual Calc Float Accrued DCF (Arithmetic Compounding): " + dblDCF);

        return lsfc;
    }

    public static final void main (
        final String[] astrArgs)
        throws Exception
    {
        /*
         * Initialize the Credit Analytics Library
         */

        EnvManager.InitEnv ("");

        String strCurrency = "USD";

        JulianDate dtToday = DateUtil.CreateFromYMD (
            2015,
            DateUtil.JANUARY,
            5
        );

        MergedDiscountForwardCurve dc = CustomOISCurveBuilderSample (
            dtToday,
            strCurrency
        );

        JulianDate dtCustomOISStart = dtToday.subtractTenor ("2M");

        JulianDate dtCustomOISMaturity = dtToday.addTenor ("4M");

        OvernightLabel fri = OvernightLabel.Create (
            strCurrency
        );

        FundingLabel fundingLabel = FundingLabel.Standard (strCurrency);

        UnitCouponAccrualSetting ucasFixed = new UnitCouponAccrualSetting (
            360,
            "Act/360",
            false,
            "Act/360",
            false,
            strCurrency,
            false,
            CompositePeriodBuilder.ACCRUAL_COMPOUNDING_RULE_GEOMETRIC
        );

        ComposableFloatingUnitSetting cfusFloatingArithmetic = new ComposableFloatingUnitSetting (
            "ON",
            CompositePeriodBuilder.EDGE_DATE_SEQUENCE_OVERNIGHT,
            null,
            OvernightLabel.Create (
                strCurrency
            ),
            CompositePeriodBuilder.REFERENCE_PERIOD_IN_ADVANCE,
            0.
        );

        ComposableFloatingUnitSetting cfusFloatingGeometric = new ComposableFloatingUnitSetting (
            "ON",
            CompositePeriodBuilder.EDGE_DATE_SEQUENCE_OVERNIGHT,
            null,
            ForwardLabel.Create (
                new OvernightIndex (
                    strCurrency + "FedFund",
                    "FedFund",
                    strCurrency,
                    "Act/360",
                    strCurrency,
                    "ON",
                    0,
                    CompositePeriodBuilder.ACCRUAL_COMPOUNDING_RULE_GEOMETRIC
                ),
                "ON"
            ),
            CompositePeriodBuilder.REFERENCE_PERIOD_IN_ADVANCE,
            0.
        );

        ComposableFixedUnitSetting cfusFixed = new ComposableFixedUnitSetting (
            "6M",
            CompositePeriodBuilder.EDGE_DATE_SEQUENCE_REGULAR,
            null,
            0.,
            0.,
            strCurrency
        );

        CompositePeriodSetting cpsFloating = new CompositePeriodSetting (
            360,
            "ON",
            strCurrency,
            null,
            -1.,
            null,
            null,
            null,
            null
        );

        CompositePeriodSetting cpsFixed = new CompositePeriodSetting (
            2,
            "6M",
            strCurrency,
            null,
            1.,
            null,
            null,
            null,
            null
        );

        List<Integer> lsFloatingStreamEdgeDate = CompositePeriodBuilder.RegularEdgeDates (
            dtCustomOISStart,
            "6M",
            "6M",
            null
        );

        List<Integer> lsFixedStreamEdgeDate = CompositePeriodBuilder.RegularEdgeDates (
            dtCustomOISStart,
            "6M",
            "6M",
            null
        );

        Stream floatStreamGeometric = new Stream (
            CompositePeriodBuilder.FloatingCompositeUnit (
                lsFloatingStreamEdgeDate,
                cpsFloating,
                cfusFloatingGeometric
            )
        );

        List<CompositePeriod> lsArithmeticFloatPeriods = CompositePeriodBuilder.FloatingCompositeUnit (
            lsFloatingStreamEdgeDate,
            cpsFloating,
            cfusFloatingArithmetic
        );

        Stream floatStreamArithmetic = new Stream (lsArithmeticFloatPeriods);

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

        FixFloatComponent oisArithmetic = new FixFloatComponent (
            fixStream,
            floatStreamArithmetic,
            new CashSettleParams (
                0,
                strCurrency,
                0
            )
        );

        FixFloatComponent oisGeometric = new FixFloatComponent (
            fixStream,
            floatStreamGeometric,
            new CashSettleParams (
                0,
                strCurrency,
                0
            )
        );

        CurveSurfaceQuoteContainer mktParams = MarketParamsBuilder.Create (
            dc,
            null,
            null,
            null,
            null,
            null,
            SetFlatOvernightFixings (
                dtCustomOISStart,
                dtCustomOISMaturity,
                dtToday,
                fri,
                0.003,
                -1.
            )
        );

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

        Map<String, Double> mapOISGeometricOutput = oisGeometric.value (
            valParams,
            null,
            mktParams,
            null
        );

        System.out.println ("\tMachine Calc Float Accrued (Geometric Compounding): " + mapOISGeometricOutput.get ("FloatAccrued"));

        Map<String, Double> mapOISArithmeticOutput = oisArithmetic.value (
            valParams,
            null,
            mktParams,
            null
        );

        System.out.println ("\tMachine Calc Float Accrued (Arithmetic Compounding): " + mapOISArithmeticOutput.get ("FloatAccrued"));

        System.out.println ("\tMachine Calc Float Accrued DCF (Arithmetic Compounding): " +
            Math.abs (mapOISGeometricOutput.get ("FloatAccrued") / mapOISGeometricOutput.get ("ResetRate")));

        CompositePeriod period = lsArithmeticFloatPeriods.get (0);

        CompositePeriodCouponMetrics pcmArithmetic = floatStreamArithmetic.coupon (
            period.endDate(),
            valParams,
            mktParams
        );

        System.out.println ("\tPeriod #1 Coupon Without Convexity Adjustment: " + pcmArithmetic.rate());

        double dblOISVol = 0.3;
        double dblUSDFundingVol = 0.3;
        double dblUSDFundingUSDOISCorrelation = 0.3;

        mktParams.setForwardVolatility (
            ScenarioDeterministicVolatilityBuilder.FlatForward (
                valParams.valueDate(),
                VolatilityLabel.Standard (fri),
                fri.currency(),
                dblOISVol
            )
        );

        mktParams.setFundingVolatility (
            ScenarioDeterministicVolatilityBuilder.FlatForward (
                valParams.valueDate(),
                VolatilityLabel.Standard (fundingLabel),
                fri.currency(),
                dblUSDFundingVol
            )
        );

        mktParams.setForwardFundingCorrelation (
            fri,
            fundingLabel,
            new FlatUnivariate (dblUSDFundingUSDOISCorrelation)
        );

        System.out.println (
            "\tPeriod #1 Coupon With Convexity Adjustment: " + floatStreamArithmetic.coupon (
                period.endDate(),
                valParams,
                mktParams
            ).rate()
        );

        EnvManager.TerminateEnv();
    }
}