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();
}
}