JurisdictionVenueOptionValuation.java

package org.drip.sample.forwardratefutures;

import java.util.*;

import org.drip.analytics.date.*;
import org.drip.function.r1tor1.FlatUnivariate;
import org.drip.market.otc.*;
import org.drip.numerical.common.FormatUtil;
import org.drip.param.creator.*;
import org.drip.param.market.CurveSurfaceQuoteContainer;
import org.drip.param.valuation.*;
import org.drip.product.creator.SingleStreamOptionBuilder;
import org.drip.product.fra.FRAStandardCapFloorlet;
import org.drip.product.rates.*;
import org.drip.sample.forward.OvernightIndexCurve;
import org.drip.service.env.EnvManager;
import org.drip.spline.basis.PolynomialFunctionSetParams;
import org.drip.spline.stretch.MultiSegmentSequenceBuilder;
import org.drip.state.creator.*;
import org.drip.state.discount.*;
import org.drip.state.forward.ForwardCurve;
import org.drip.state.identifier.*;

/*
 * -*- 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>JurisdictionVenueOptionValuation</i> contains the Demonstration of the Construction and the Valuation
 * of the Options on Standardized LIBOR Futures Contract across Jurisdictions and Venues.
 *  
 * <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/forwardratefutures/README.md">Forward Rate Futures Analytics</a></li>
 *  </ul>
 * <br><br>
 * 
 * @author Lakshmi Krishnamurthy
 */

public class JurisdictionVenueOptionValuation {

    private static final FloatFloatComponent OTCFloatFloat (
        final JulianDate dtSpot,
        final String strCurrency,
        final String strDerivedTenor,
        final String strMaturityTenor,
        final double dblBasis)
    {
        FloatFloatSwapConvention ffConv = IBORFloatFloatContainer.ConventionFromJurisdiction (strCurrency);

        return ffConv.createFloatFloatComponent (
            dtSpot,
            strDerivedTenor,
            strMaturityTenor,
            dblBasis,
            1.
        );
    }

    /*
     * Construct an array of float-float swaps from the corresponding reference (6M) and the derived legs.
     * 
     *      USE WITH CARE: This sample ignores errors and does not handle exceptions.
     */

    private static final FloatFloatComponent[] MakexM6MBasisSwap (
        final JulianDate dtSpot,
        final String strCurrency,
        final String[] astrMaturityTenor,
        final int iTenorInMonths)
        throws Exception
    {
        FloatFloatComponent[] aFFC = new FloatFloatComponent[astrMaturityTenor.length];

        for (int i = 0; i < astrMaturityTenor.length; ++i)
            aFFC[i] = OTCFloatFloat (
                dtSpot,
                strCurrency,
                iTenorInMonths + "M",
                astrMaturityTenor[i],
                0.
            );

        return aFFC;
    }

    private static final ForwardCurve MakeFC (
        final JulianDate dtSpot,
        final String strCurrency,
        final MergedDiscountForwardCurve dc,
        final int iTenorInMonths,
        final String[] astrxM6MFwdTenor,
        final double[] adblxM6MBasisSwapQuote)
        throws Exception
    {
        /*
         * Construct the 6M-xM float-float basis swap.
         */

        FloatFloatComponent[] aFFC = MakexM6MBasisSwap (
            dtSpot,
            strCurrency,
            astrxM6MFwdTenor,
            iTenorInMonths
        );

        String strBasisTenor = iTenorInMonths + "M";

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

        /*
         * Calculate the starting forward rate off of the discount curve.
         */

        double dblStartingFwd = dc.forward (
            dtSpot.julian(),
            dtSpot.addTenor (strBasisTenor).julian()
        );

        /*
         * Set the discount curve based component market parameters.
         */

        CurveSurfaceQuoteContainer mktParams = MarketParamsBuilder.Create (
            dc,
            null,
            null,
            null,
            null,
            null,
            null
        );

        /*
         * Construct the shape preserving forward curve off of Quartic Polynomial Basis Spline.
         */

        return ScenarioForwardCurveBuilder.ShapePreservingForwardCurve (
            "QUARTIC_FWD" + strBasisTenor,
            ForwardLabel.Create (
                strCurrency,
                strBasisTenor
            ),
            valParams,
            null,
            mktParams,
            null,
            MultiSegmentSequenceBuilder.BASIS_SPLINE_POLYNOMIAL,
            new PolynomialFunctionSetParams (5),
            aFFC,
            "DerivedParBasisSpread",
            adblxM6MBasisSwapQuote,
            dblStartingFwd
        );
    }

    private static final Map<String, ForwardCurve> MakeFC (
        final JulianDate dt,
        final String strCurrency,
        final MergedDiscountForwardCurve dc)
        throws Exception
    {
        Map<String, ForwardCurve> mapFC = new HashMap<String, ForwardCurve>();

        /*
         * Build and run the sampling for the 1M-6M Tenor Basis Swap from its instruments and quotes.
         */

        ForwardCurve fc1M = MakeFC (
            dt,
            strCurrency,
            dc,
            1,
            new String[] {
                "1Y", "2Y", "3Y", "4Y", "5Y", "6Y", "7Y", "8Y", "9Y", "10Y", "11Y", "12Y", "15Y", "20Y", "25Y", "30Y"
            },
            new double[] {
                0.00551,    //  1Y
                0.00387,    //  2Y
                0.00298,    //  3Y
                0.00247,    //  4Y
                0.00211,    //  5Y
                0.00185,    //  6Y
                0.00165,    //  7Y
                0.00150,    //  8Y
                0.00137,    //  9Y
                0.00127,    // 10Y
                0.00119,    // 11Y
                0.00112,    // 12Y
                0.00096,    // 15Y
                0.00079,    // 20Y
                0.00069,    // 25Y
                0.00062     // 30Y
                }
            );

        mapFC.put (
            "1M",
            fc1M
        );

        /*
         * Build and run the sampling for the 3M-6M Tenor Basis Swap from its instruments and quotes.
         */

        ForwardCurve fc3M = MakeFC (
            dt,
            strCurrency,
            dc,
            3,
            new String[] {
                "1Y", "2Y", "3Y", "4Y", "5Y", "6Y", "7Y", "8Y", "9Y", "10Y", "11Y", "12Y", "15Y", "20Y", "25Y", "30Y"
            },
            new double[] {
                0.00186,    //  1Y
                0.00127,    //  2Y
                0.00097,    //  3Y
                0.00080,    //  4Y
                0.00067,    //  5Y
                0.00058,    //  6Y
                0.00051,    //  7Y
                0.00046,    //  8Y
                0.00042,    //  9Y
                0.00038,    // 10Y
                0.00035,    // 11Y
                0.00033,    // 12Y
                0.00028,    // 15Y
                0.00022,    // 20Y
                0.00020,    // 25Y
                0.00018     // 30Y
                }
            );

        mapFC.put (
            "3M",
            fc3M
        );

        /*
         * Build and run the sampling for the 12M-6M Tenor Basis Swap from its instruments and quotes.
         */

        ForwardCurve fc12M = MakeFC (
            dt,
            strCurrency,
            dc,
            12,
            new String[] {
                "1Y", "2Y", "3Y", "4Y", "5Y", "6Y", "7Y", "8Y", "9Y", "10Y", "11Y", "12Y", "15Y", "20Y", "25Y", "30Y",
                "35Y", "40Y" // Extrapolated
            },
            new double[] {
                -0.00212,    //  1Y
                -0.00152,    //  2Y
                -0.00117,    //  3Y
                -0.00097,    //  4Y
                -0.00082,    //  5Y
                -0.00072,    //  6Y
                -0.00063,    //  7Y
                -0.00057,    //  8Y
                -0.00051,    //  9Y
                -0.00047,    // 10Y
                -0.00044,    // 11Y
                -0.00041,    // 12Y
                -0.00035,    // 15Y
                -0.00028,    // 20Y
                -0.00025,    // 25Y
                -0.00022,    // 30Y
                -0.00022,    // 35Y Extrapolated
                -0.00022,    // 40Y Extrapolated
                }
            );

        mapFC.put (
            "12M",
            fc12M
        );

        return mapFC;
    }

    private static final void SetVolCorrelation (
        final int iValueDate,
        final CurveSurfaceQuoteContainer mktParams,
        final ForwardLabel fri,
        final double dblForwardVol,
        final double dblFundingVol,
        final double dblForwardFundingCorr)
        throws Exception
    {
        FundingLabel fundingLabel = FundingLabel.Standard (fri.currency());

        mktParams.setForwardVolatility (
            ScenarioDeterministicVolatilityBuilder.FlatForward (
                iValueDate,
                VolatilityLabel.Standard (fri),
                fri.currency(),
                dblForwardVol
            )
        );

        mktParams.setFundingVolatility (
            ScenarioDeterministicVolatilityBuilder.FlatForward (
                iValueDate,
                VolatilityLabel.Standard (fundingLabel),
                fri.currency(),
                dblFundingVol
            )
        );

        mktParams.setForwardFundingCorrelation (
            fri,
            fundingLabel,
            new FlatUnivariate (dblForwardFundingCorr)
        );
    }

    private static final void FuturesOptionMetrics (
        final String strCurrency,
        final String strTenor,
        final JulianDate dtSpot,
        final String strOptionType,
        final String strExchange)
        throws Exception
    {
        MergedDiscountForwardCurve dcOIS = OvernightIndexCurve.MakeDC (
            dtSpot,
            strCurrency
        );

        ForwardLabel forwardLabel = ForwardLabel.Create (
            strCurrency,
            strTenor
        );

        Map<String, ForwardCurve> mapFC = MakeFC (
            dtSpot,
            strCurrency,
            dcOIS
        );

        ForwardCurve fc = mapFC.get (strTenor);

        JulianDate dtEffective = dtSpot.addTenor ("3M");

        FRAStandardCapFloorlet liborFuturesOption = SingleStreamOptionBuilder.ExchangeTradedFuturesOption (
            dtEffective,
            forwardLabel,
            fc.forward (dtEffective.addTenor (fc.tenor())),
            "ParForward",
            false,
            strOptionType,
            strExchange
        );

        CurveSurfaceQuoteContainer mktParams = MarketParamsBuilder.Create (
            dcOIS,
            fc,
            null,
            null,
            null,
            null,
            null,
            null
        );

        double dblForwardVol = 0.50;
        double dblFundingVol = 0.50;
        double dblForwardFundingCorr = 0.50;

        SetVolCorrelation (
            dtSpot.julian(),
            mktParams,
            forwardLabel,
            dblForwardVol,
            dblFundingVol,
            dblForwardFundingCorr
        );

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

        Map<String, Double> mapOutput = liborFuturesOption.value (
            valParams,
            null,
            mktParams,
            null
        );

        System.out.println ("\t\t" + strExchange + " | " +
            FormatUtil.FormatDouble (mapOutput.get ("ATMFRA"), 1, 4, 100.) + " % | " +
            FormatUtil.FormatDouble (mapOutput.get ("Upfront"), 1, 1, 10000.) + " bp | " +
            forwardLabel.fullyQualifiedName()
        );
    }

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

        EnvManager.InitEnv ("");

        JulianDate dtToday = DateUtil.Today();

        System.out.println ("\tOutput Order - L -> R:");

        System.out.println ("\t\tExchange\n\t\tATM Par FRA Level (%)\n\t\tOption Upfront (bp)\n\t\tFRA Label");

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

        System.out.println ("\t--------------- MARGIN TYPE OPTION ------------------");

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

        FuturesOptionMetrics (
            "CHF",
            "3M",
            dtToday,
            "MARGIN",
            "LIFFE"
        );

        FuturesOptionMetrics (
            "GBP",
            "3M",
            dtToday,
            "MARGIN",
            "LIFFE"
        );

        /* FuturesOptionMetrics (
            "EUR",
            "3M",
            dtToday,
            "MARGIN",
            "LIFFE"
        ); */

        FuturesOptionMetrics (
            "USD",
            "3M",
            dtToday,
            "MARGIN",
            "LIFFE"
        );

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

        System.out.println ("\t-------------- PREMIUM TYPE OPTION ------------------");

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

        FuturesOptionMetrics (
            "JPY",
            "3M",
            dtToday,
            "PREMIUM",
            "SGX"
        );

        FuturesOptionMetrics (
            "USD",
            "1M",
            dtToday,
            "PREMIUM",
            "CME"
        );

        FuturesOptionMetrics (
            "USD",
            "3M",
            dtToday,
            "PREMIUM",
            "CME"
        );

        FuturesOptionMetrics (
            "USD",
            "3M",
            dtToday,
            "PREMIUM",
            "SGX"
        );

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

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

        EnvManager.TerminateEnv();
    }
}