MultiCurveFRAMarketAnalysis.java

package org.drip.sample.fra;

import java.util.Map;

import org.drip.analytics.date.*;
import org.drip.function.r1tor1.*;
import org.drip.numerical.common.FormatUtil;
import org.drip.param.creator.MarketParamsBuilder;
import org.drip.param.market.CurveSurfaceQuoteContainer;
import org.drip.param.valuation.ValuationParams;
import org.drip.product.creator.SingleStreamComponentBuilder;
import org.drip.product.fra.FRAMarketComponent;
import org.drip.sample.forward.*;
import org.drip.service.env.EnvManager;
import org.drip.state.discount.*;
import org.drip.state.forward.ForwardCurve;
import org.drip.state.identifier.*;
import org.drip.state.nonlinear.FlatForwardVolatilityCurve;
import org.drip.state.volatility.VolatilityCurve;

/*
 * -*- 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>MultiCurveFRAMarketAnalysis</i> contains an analysis of the correlation and volatility impact on the
 * Market 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 MultiCurveFRAMarketAnalysis {
    static class FRAMktConvexityCorrection {
        double _dblParMktFwd = Double.NaN;
        double _dblParStdFwd = Double.NaN;
        double _dblConvexityCorrection = Double.NaN;

        FRAMktConvexityCorrection (
            final double dblParMktFwd,
            final double dblParStdFwd,
            final double dblConvexityCorrection)
        {
            _dblParMktFwd = dblParMktFwd;
            _dblParStdFwd = dblParStdFwd;
            _dblConvexityCorrection = dblConvexityCorrection;
        }
    }

    private static final VolatilityCurve ATMVolatilityCurve (
        final JulianDate dtEpoch,
        final VolatilityLabel label,
        final String strCurrency,
        final String[] astrTenor,
        final double[] adblVolatility)
        throws Exception
    {
        int[] iPillarDate = new int[astrTenor.length];

        for (int i = 0; i < iPillarDate.length; ++i)
            iPillarDate[i] = dtEpoch.addTenor (astrTenor[i]).julian();

        return new FlatForwardVolatilityCurve (
            dtEpoch.julian(),
            label,
            strCurrency,
            iPillarDate,
            adblVolatility
        );
    }

    public static final FRAMktConvexityCorrection FRAMktMetric (
        final JulianDate dtValue,
        final MergedDiscountForwardCurve dcEONIA,
        final ForwardCurve fcEURIBOR6M,
        final String strForwardStartTenor,
        final VolatilityCurve vcEONIA,
        final VolatilityCurve vcEURIBOR6M,
        final double dblEONIAEURIBOR6MCorrelation)
        throws Exception
    {
        String strTenor = "6M";
        String strCurrency = "USD";

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

        FundingLabel fundingLabel = FundingLabel.Standard (strCurrency);

        JulianDate dtForwardStart = dtValue.addTenor (strForwardStartTenor);

        FRAMarketComponent fra = SingleStreamComponentBuilder.FRAMarket (
            dtForwardStart,
            fri,
            0.006
        );

        CurveSurfaceQuoteContainer mktParams = MarketParamsBuilder.Create (
            dcEONIA,
            fcEURIBOR6M,
            null,
            null,
            null,
            null,
            null,
            null
        );

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

        mktParams.setForwardVolatility (vcEURIBOR6M);

        mktParams.setFundingVolatility (vcEONIA);

        mktParams.setForwardFundingCorrelation (
            fri,
            fundingLabel,
            new FlatUnivariate (dblEONIAEURIBOR6MCorrelation)
        );

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

        return new FRAMktConvexityCorrection (
            mapFRAOutput.get ("shiftedlognormalparmarketfra"),
            mapFRAOutput.get ("parstandardfra"),
            mapFRAOutput.get ("shiftedlognormalconvexitycorrection")
        );
    }

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

        EnvManager.InitEnv ("");

        String strTenor = "6M";
        String strCurrency = "USD";

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

        MergedDiscountForwardCurve dcEONIA = OvernightIndexCurve.MakeDC (
            dtToday,
            strCurrency
        );

        ForwardCurve fcEURIBOR6M = IBOR6MQuarticPolyVanilla.Make6MForward (
            dtToday,
            strCurrency,
            strTenor
        );

        String[] astrForwardStartTenor = {
            "6M",
            "1Y",
            "2Y",
            "3Y",
            "4Y",
            "5Y",
            "6Y",
            "7Y",
            "8Y",
            "9Y"
        };

        double[] adblVolatility = new double[] {
            0.5946, // 6M
            0.5311, // 1Y
            0.3307, // 2Y
            0.2929, // 3Y
            0.2433, // 4Y
            0.2013, // 5Y
            0.1855, // 6Y
            0.1789, // 7Y
            0.1655, // 8Y
            0.1574  // 9Y
        };

        double dblEONIAEURIBOR6MCorrelation = 0.8;

        VolatilityCurve vcEONIA = ATMVolatilityCurve (
            dtToday,
            VolatilityLabel.Standard (FundingLabel.Standard (strCurrency)),
            strCurrency,
            astrForwardStartTenor,
            adblVolatility
        );

        VolatilityCurve vEURIBOR6M = ATMVolatilityCurve (
            dtToday,
            VolatilityLabel.Standard (
                ForwardLabel.Create (
                    strCurrency,
                    strTenor
                )
            ),
            strCurrency,
            astrForwardStartTenor,
            adblVolatility
        );

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

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

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

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

        System.out.println ("\tTNR =>   MKT   |   STD   |  CONV ");

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

        for (String strForwardStartTenor : astrForwardStartTenor) {
            FRAMktConvexityCorrection fraMktMetric = FRAMktMetric (
                dtToday,
                dcEONIA,
                fcEURIBOR6M,
                strForwardStartTenor,
                vcEONIA,
                vEURIBOR6M,
                dblEONIAEURIBOR6MCorrelation
            );

            System.out.println (
                "\t " + strForwardStartTenor + " => " +
                FormatUtil.FormatDouble (fraMktMetric._dblParMktFwd, 1, 3, 100.) + "% | " +
                FormatUtil.FormatDouble (fraMktMetric._dblParStdFwd, 1, 3, 100.) + "% | " +
                FormatUtil.FormatDouble (fraMktMetric._dblConvexityCorrection, 1, 2, 10000.)
            );
        }

        EnvManager.TerminateEnv();
    }
}