TwoFactorLIBORVolatility.java

package org.drip.sample.lmm;

import org.drip.analytics.date.*;
import org.drip.analytics.definition.MarketSurface;
import org.drip.dynamics.lmm.LognormalLIBORVolatility;
import org.drip.market.otc.*;
import org.drip.numerical.common.FormatUtil;
import org.drip.param.valuation.ValuationParams;
import org.drip.product.creator.SingleStreamComponentBuilder;
import org.drip.product.definition.CalibratableComponent;
import org.drip.product.rates.FixFloatComponent;
import org.drip.sequence.random.*;
import org.drip.service.env.EnvManager;
import org.drip.spline.basis.PolynomialFunctionSetParams;
import org.drip.spline.params.*;
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.ForwardLabel;

/*
 * -*- 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
 * 
 *  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>TwoFactorLIBORVolatility</i> demonstrates the Construction and Usage of the 2 Factor LIBOR Forward Rate
 * Volatility. The References are:
 *  
 * <br><br>
 *  <ul>
 *      <li>
 *          Goldys, B., M. Musiela, and D. Sondermann (1994): Log-normality of Rates and Term Structure
 *              Models, The University of New South Wales.
 *      </li>
 *      <li>
 *          Musiela, M. (1994): Nominal Annual Rates and Log-normal Volatility Structure, The University of
 *              New South Wales.
 *      </li>
 *      <li>
 *          Brace, A., D. Gatarek, and M. Musiela (1997): The Market Model of Interest Rate Dynamics,
 *              Mathematical Finance 7 (2), 127-155.
 *      </li>
 *  </ul>
 *  
 * <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/lmm/README.md">LIBOR Market (LMM-BGM Variant) Evolution</a></li>
 *  </ul>
 * <br><br>
 *
 * @author Lakshmi Krishnamurthy
 */

public class TwoFactorLIBORVolatility {

    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 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;
    }

    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;
    }

    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[] {
                30,
                60,
                91,
                182,
                273
            },
            0,
            strCurrency
        );

        double[] adblDepositQuote = new double[] {
            0.0668750,  //  30D
            0.0675000,  //  60D
            0.0678125,  //  91D
            0.0712500,  // 182D
            0.0750000   // 273D
        };

        String[] astrDepositManifestMeasure = new String[] {
            "ForwardRate", //  30D
            "ForwardRate", //  60D
            "ForwardRate", //  91D
            "ForwardRate", // 182D
            "ForwardRate"  // 273D
        };

        /*
         * Construct the array of Swap instruments and their quotes.
         */

        double[] adblSwapQuote = new double[] {
            0.08265,    //  2Y
            0.08550,    //  3Y
            0.08655,    //  4Y
            0.08770,    //  5Y
            0.08910,    //  7Y
            0.08920     // 10Y
        };

        String[] astrSwapManifestMeasure = new String[] {
            "SwapRate",    //  2Y
            "SwapRate",    //  3Y
            "SwapRate",    //  4Y
            "SwapRate",    //  5Y
            "SwapRate",    //  7Y
            "SwapRate"     // 10Y
        };

        CalibratableComponent[] aSwapComp = SwapInstrumentsFromMaturityTenor (
            dtSpot,
            strCurrency,
            new java.lang.String[] {
                "2Y",
                "3Y",
                "4Y",
                "5Y",
                "7Y",
                "10Y"
            },
            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
        );
    }

    private static final MarketSurface FactorFlatVolatilitySurface (
        final JulianDate dtStart,
        final String strCurrency,
        final String[] astrMaturityTenor,
        final double[] adblFactorFlatVolatility,
        final double[] adblTermStructureLoading)
        throws Exception
    {
        int iNumNode = astrMaturityTenor.length + 1;
        double[] adblDate = new double[iNumNode];
        double[][] aadblVolatility = new double[iNumNode][iNumNode];

        for (int i = 0; i < iNumNode; ++i)
            adblDate[i] = 0 == i ? adblDate[i] = dtStart.julian() : dtStart.addTenor (astrMaturityTenor[i - 1]).julian();

        for (int i = 0; i < iNumNode; ++i) {
            for (int j = 0; j < iNumNode; ++j)
                aadblVolatility[i][j] =
                    0 == i || 0 == j ?
                    adblFactorFlatVolatility[0] :
                    adblTermStructureLoading[i - 1] * adblFactorFlatVolatility[j - 1];
        }

        return ScenarioMarketSurfaceBuilder.CustomSplineWireSurface (
            "VIEW_TARGET_VOLATILITY_SURFACE",
            dtStart,
            strCurrency,
            adblDate,
            adblDate,
            aadblVolatility,
            new SegmentCustomBuilderControl (
                MultiSegmentSequenceBuilder.BASIS_SPLINE_POLYNOMIAL,
                new PolynomialFunctionSetParams (2),
                SegmentInelasticDesignControl.Create (
                    0,
                    2
                ),
                null,
                null
            ),
            new SegmentCustomBuilderControl (
                MultiSegmentSequenceBuilder.BASIS_SPLINE_POLYNOMIAL,
                new PolynomialFunctionSetParams (4),
                SegmentInelasticDesignControl.Create (
                    2,
                    2
                ),
                null,
                null
            )
        );
    }

    private static final void DisplayVolArray (
        final String strTenor,
        final double[] adblVol)
    {
        String strDump = "\t | " + strTenor + " =>  ";

        for (int i = 0; i < adblVol.length; ++i)
            strDump += FormatUtil.FormatDouble (adblVol[i], 1, 2, 100.) + "% | ";

        System.out.println (strDump);
    }

    public static final void main (
        final String[] astrArgs)
        throws Exception
    {
        EnvManager.InitEnv ("");

        JulianDate dtSpot = DateUtil.CreateFromYMD (
            1995,
            DateUtil.FEBRUARY,
            3
        );

        String strFRATenor = "3M";
        String strCurrency = "GBP";

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

        MergedDiscountForwardCurve dc = MakeDC (
            dtSpot,
            strCurrency
        );

        ForwardCurve fcNative = dc.nativeForwardCurve (strFRATenor);

        String[] astrMaturityTenor = new String[] {
             "3M",
             "6M",
            "12M",
            "18M",
            "24M",
            "30M",
             "3Y",
             "4Y",
             "5Y",
             "7Y",
             "9Y",
            "11Y"
        };

        double[] adblFlatTermStructure = new double[] {
            1.00000000, //  "3M",
            1.00000000, //  "6M",
            0.99168448, // "12M",
            1.00388389, // "18M",
            1.00388389, // "24M",
            1.07602593, // "30M",
            1.07602593, //  "3Y",
            1.04727642, //  "4Y",
            1.02727799, //  "5Y",
            0.96660430, //  "7Y",
            0.93012459, //  "9Y",
            0.81425256  // "11Y"
        };

        double[] adblFlatVolFactor1 = new double[] {
            0.09481393, //  "3M",
            0.08498925, //  "6M",
            0.22939966, // "12M",
            0.19166872, // "18M",
            0.08232925, // "24M",
            0.18548202, // "30M",
            0.13817885, //  "3Y",
            0.08562258, //  "4Y",
            0.14547123, //  "5Y",
            0.08869328, //  "7Y",
            0.04121240, //  "9Y",
            0.15206796  // "11Y"
        };

        double[] adblFlatVolFactor2 = new double[] {
             0.12146092, //  "3M",
             0.05117321, //  "6M",
             0.09100802, // "12M",
             0.02876211, // "18M",
             0.01172983, // "24M",
             0.00047705, // "30M",
            -0.01160086, //  "3Y",
            -0.04673283, //  "4Y",
            -0.04181446, //  "5Y",
            -0.05459175, //  "7Y",
            -0.03631021, //  "9Y",
            -0.16626765  // "11Y"
        };

        MarketSurface mktSurf1 = FactorFlatVolatilitySurface (
            dtSpot,
            strCurrency,
            astrMaturityTenor,
            adblFlatVolFactor1,
            adblFlatTermStructure
        );

        MarketSurface mktSurf2 = FactorFlatVolatilitySurface (
            dtSpot,
            strCurrency,
            astrMaturityTenor,
            adblFlatVolFactor2,
            adblFlatTermStructure
        );

        LognormalLIBORVolatility llv = new LognormalLIBORVolatility (
            dtSpot.julian(),
            forwardLabel,
            new MarketSurface[] {
                mktSurf1,
                mktSurf2
            },
            new PrincipalFactorSequenceGenerator (
                new UnivariateSequenceGenerator[] {
                    new BoxMullerGaussian (
                        0.,
                        1.
                    ),
                    new BoxMullerGaussian (
                        0.,
                        1.
                    )
                },
                new double[][] {
                    {1.0, 0.1},
                    {0.1, 1.0},
                },
                2
            )
        );

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

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

        System.out.println ("\t |  CONTINUOUS FORWARD RATE VOL |");

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

        for (String strForwardTenor : astrForwardTenor)
            DisplayVolArray (
                strForwardTenor,
                llv.continuousForwardVolatility (
                    dtSpot.addTenor (strForwardTenor).julian(),
                    fcNative
                )
            );

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

        EnvManager.TerminateEnv();
    }
}