FRAStandardOptionAnalysis.java
package org.drip.sample.fra;
import java.util.*;
import org.drip.analytics.date.*;
import org.drip.function.r1tor1.FlatUnivariate;
import org.drip.market.otc.*;
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>FRAStandardOptionAnalysis</i> contains the demonstration of the custom volatility-correlation analysis
* of Option on a Standard Multi-Curve FRA.
*
* <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 FRAStandardOptionAnalysis {
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"
},
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 VolCorrScenario (
final FRAStandardComponent fra,
final ValuationParams valParams,
final CurveSurfaceQuoteContainer mktParams,
final double dblForwardVol,
final double dblFundingVol,
final double dblForwardFundingCorr)
throws Exception
{
ForwardLabel fri = fra.forwardLabel().get ("DERIVED");
FundingLabel fundingLabel = FundingLabel.Standard (fri.currency());
mktParams.setForwardVolatility (
ScenarioDeterministicVolatilityBuilder.FlatForward (
valParams.valueDate(),
VolatilityLabel.Standard (fri),
fri.currency(),
dblForwardVol
)
);
mktParams.setFundingVolatility (
ScenarioDeterministicVolatilityBuilder.FlatForward (
valParams.valueDate(),
VolatilityLabel.Standard (fundingLabel),
fri.currency(),
dblFundingVol
)
);
mktParams.setForwardFundingCorrelation (
fri,
fundingLabel,
new FlatUnivariate (dblForwardFundingCorr)
);
double dblStrike = 0.0189;
String strManifestMeasure = "QuantoAdjustedParForward";
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
);
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> mapFRACapletOutput = fraCaplet.value (
valParams,
null,
mktParams,
null
);
Map<String, Double> mapFRAFloorletOutput = fraFloorlet.value (
valParams,
null,
mktParams,
null
);
double dblATMFRA = mapFRACapletOutput.get ("ATMFRA");
double dblManifestMeasureIntrinsic = mapFRACapletOutput.get ("ManifestMeasureIntrinsic");
double dblManifestMeasureIntrinsicValue = mapFRACapletOutput.get ("ManifestMeasureIntrinsicValue");
double dblForwardATMCapletPrice = mapFRACapletOutput.get ("ForwardATMIntrinsic");
double dblSpotCapletPrice = mapFRACapletOutput.get ("SpotPrice");
double dblForwardATMFloorletPrice = mapFRAFloorletOutput.get ("ForwardATMIntrinsic");
double dblSpotFloorletPrice = mapFRAFloorletOutput.get ("SpotPrice");
System.out.println ("\t[" +
org.drip.numerical.common.FormatUtil.FormatDouble (dblForwardVol, 2, 0, 100.) + "%," +
org.drip.numerical.common.FormatUtil.FormatDouble (dblFundingVol, 2, 0, 100.) + "%," +
org.drip.numerical.common.FormatUtil.FormatDouble (dblForwardFundingCorr, 2, 0, 100.) + "%] =" +
org.drip.numerical.common.FormatUtil.FormatDouble (dblATMFRA, 1, 4, 100.) + "% | " +
org.drip.numerical.common.FormatUtil.FormatDouble (dblManifestMeasureIntrinsic, 1, 1, 10000.) + " | " +
org.drip.numerical.common.FormatUtil.FormatDouble (dblManifestMeasureIntrinsicValue, 1, 1, 10000.) + " | " +
org.drip.numerical.common.FormatUtil.FormatDouble (dblForwardATMCapletPrice, 1, 1, 10000.) + " | " +
org.drip.numerical.common.FormatUtil.FormatDouble (dblSpotCapletPrice, 1, 1, 10000.) + " | " +
org.drip.numerical.common.FormatUtil.FormatDouble (dblForwardATMFloorletPrice, 1, 1, 10000.) + " | " +
org.drip.numerical.common.FormatUtil.FormatDouble (dblSpotFloorletPrice, 1, 1, 10000.));
}
public static final void main (
final String[] astrArgs)
throws Exception
{
/*
* Initialize the Credit Analytics Library
*/
EnvManager.InitEnv ("");
String strTenor = "3M";
String strCurrency = "USD";
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
);
double[] adblSigmaFwd = new double[] {0.1, 0.2, 0.3, 0.4, 0.5};
double[] adblSigmaFwd2DomX = new double[] {0.10, 0.15, 0.20, 0.25, 0.30};
double[] adblCorrFwdFwd2DomX = new double[] {-0.99, -0.50, 0.00, 0.50, 0.99};
System.out.println ("\tPrinting the IRS Output in Order (Left -> Right):");
System.out.println ("\t\tFRA ATM (%)");
System.out.println ("\t\tManifest Measure Instrinsic (bp)");
System.out.println ("\t\tManifest Measure Instrinsic Value");
System.out.println ("\t\tForward Caplet ATM Price");
System.out.println ("\t\tSpot Caplet Price");
System.out.println ("\t\tForward Floorlet ATM Price");
System.out.println ("\t\tSpot Floorlet Price");
System.out.println ("\t-------------------------------------------------------------");
System.out.println ("\t-------------------------------------------------------------");
for (double dblSigmaFwd : adblSigmaFwd) {
for (double dblSigmaFwd2DomX : adblSigmaFwd2DomX) {
for (double dblCorrFwdFwd2DomX : adblCorrFwdFwd2DomX)
VolCorrScenario (
fra,
valParams,
mktParams,
dblSigmaFwd,
dblSigmaFwd2DomX,
dblCorrFwdFwd2DomX
);
}
}
EnvManager.TerminateEnv();
}
}