FRAStandardOption.java

package org.drip.sample.fra;

import java.util.*;

import org.drip.analytics.date.*;
import org.drip.function.r1tor1.*;
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.pricer.option.BlackScholesAlgorithm;
import org.drip.product.creator.*;
import org.drip.product.definition.*;
import org.drip.product.fra.*;
import org.drip.product.params.LastTradingDateSetting;
import org.drip.product.rates.*;
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>FRAStandardOption</i> contains the demonstration of the Valuation of an Option on a Multi-Curve FRA
 * Standard.
 *  
 * <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/fra/README.md">FRA Analytics</a></li>
 *  </ul>
 * <br><br>
 * 
 * @author Lakshmi Krishnamurthy
 */

public class FRAStandardOption {

    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.
        );
    }

    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 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 iNumFuture,
        final String strCurrency)
        throws Exception
    {
        CalibratableComponent[] aCalibComp = new CalibratableComponent[aiDay.length + iNumFuture];

        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,
            iNumFuture,
            strCurrency
        );

        for (int i = aiDay.length; i < aiDay.length + iNumFuture; ++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 FixFloatComponent[] 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,
                strCurrency
            ),
            aDepositComp,
            adblDepositQuote,
            astrDepositManifestMeasure,
            aSwapComp,
            adblSwapQuote,
            astrSwapManifestMeasure,
            false
        );
    }

    /*
     * 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;
    }

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

        EnvManager.InitEnv ("");

        String strTenor = "3M";
        String strCurrency = "USD";
        String strManifestMeasure = "QuantoAdjustedParForward";
        double dblForwardVol = 0.3;
        double dblFundingVol = 0.1;
        double dblForwardFundingCorr = 0.2;
        double dblCorrMeanReverterHazard = 0.4 / 365.25;

        JulianDate dtToday = DateUtil.Today().addTenor ("0D");

        /*
         * Construct the Discount Curve using its instruments and quotes
         */

        MergedDiscountForwardCurve dc = MakeDC (
            dtToday,
            strCurrency
        );

        Map<String, ForwardCurve> mapFC = MakeFC (
            dtToday,
            strCurrency,
            dc
        );

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

        JulianDate dtForwardStart = dtToday.addTenor (strTenor);

        FRAStandardComponent fra = SingleStreamComponentBuilder.FRAStandard (
            dtForwardStart,
            fri,
            0.006
        );

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

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

        FundingLabel fundingLabel = FundingLabel.Standard (fri.currency());

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

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

        mktParams.setForwardFundingCorrelation (
            fri,
            fundingLabel,
            new AndersenPiterbargMeanReverter (
                new ExponentialDecay (
                    dtToday.julian(),
                    dblCorrMeanReverterHazard),
                new FlatUnivariate (dblForwardFundingCorr)
            )
        );

        Map<String, Double> mapFRAOutput = fra.value (
            valParams,
            null,
            mktParams,
            null
        );

        double dblStrike = 1.01 * mapFRAOutput.get (strManifestMeasure);

        FRAStandardCapFloorlet fraCaplet = new FRAStandardCapFloorlet (
            fra.name() + "::CAPLET",
            fra,
            strManifestMeasure,
            true,
            dblStrike,
            1.,
            new LastTradingDateSetting (
                LastTradingDateSetting.MID_CURVE_OPTION_QUARTERLY,
                "",
                Integer.MIN_VALUE
            ),
            new BlackScholesAlgorithm(),
            null
        );

        Map<String, Double> mapFRACapletOutput = fraCaplet.value (
            valParams,
            null,
            mktParams,
            null
        );

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

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

        for (Map.Entry<String, Double> me : mapFRACapletOutput.entrySet())
            System.out.println ("\t" + me.getKey() + " => " + me.getValue());

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

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

        FRAStandardCapFloorlet fraFloorlet = new FRAStandardCapFloorlet (
            fra.name() + "::FLOORLET",
            fra,
            strManifestMeasure,
            false,
            dblStrike,
            1.,
            new LastTradingDateSetting (
                LastTradingDateSetting.MID_CURVE_OPTION_QUARTERLY,
                "",
                Integer.MIN_VALUE
            ),
            new BlackScholesAlgorithm(),
            null
        );

        Map<String, Double> mapFRAFloorletOutput = fraFloorlet.value (
            valParams,
            null,
            mktParams,
            null
        );

        for (Map.Entry<String, Double> me : mapFRAFloorletOutput.entrySet())
            System.out.println ("\t" + me.getKey() + " => " + me.getValue());

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

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

        System.out.println (
            "\tPrice Implied FRA Caplet Vol       : " +
            FormatUtil.FormatDouble (fraCaplet.implyVolatility (
                valParams,
                null,
                mktParams,
                null,
                "Price",
                mapFRACapletOutput.get ("Price")
            ), 1, 2, 100.) + "%"
        );

        System.out.println (
            "\tATM Price Implied FRA Caplet Vol   : " +
            FormatUtil.FormatDouble (fraCaplet.implyVolatility (
                valParams,
                null,
                mktParams,
                null,
                "ATMPrice",
                mapFRACapletOutput.get ("ATMPrice")
            ), 1, 2, 100.) + "%"
        );

        System.out.println (
            "\tPrice Implied FRA Floorlet Vol     : " +
            FormatUtil.FormatDouble (fraFloorlet.implyVolatility (
                valParams,
                null,
                mktParams,
                null,
                "Price",
                mapFRAFloorletOutput.get ("Price")
            ), 1, 2, 100.) + "%"
        );

        System.out.println (
            "\tATM Price Implied FRA Floorlet Vol : " +
            FormatUtil.FormatDouble (fraFloorlet.implyVolatility (
                valParams,
                null,
                mktParams,
                null,
                "ATMPrice",
                mapFRAFloorletOutput.get ("ATMPrice")
            ), 1, 2, 100.) + "%"
        );

        EnvManager.TerminateEnv();
    }
}