FixFloatSwapAnalysis.java

package org.drip.sample.multicurve;

import java.util.*;

import org.drip.analytics.date.*;
import org.drip.analytics.support.*;
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.period.*;
import org.drip.param.valuation.*;
import org.drip.product.creator.*;
import org.drip.product.definition.*;
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) 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 DRIP, a free-software/open-source library for buy/side financial/trading model
 *      libraries targeting analysts and developers
 *      https://lakshmidrip.github.io/DRIP/
 *  
 *  DRIP is composed of four main libraries:
 *  
 *  - DRIP Fixed Income - https://lakshmidrip.github.io/DRIP-Fixed-Income/
 *  - DRIP Asset Allocation - https://lakshmidrip.github.io/DRIP-Asset-Allocation/
 *  - DRIP Numerical Optimizer - https://lakshmidrip.github.io/DRIP-Numerical-Optimizer/
 *  - DRIP Statistical Learning - https://lakshmidrip.github.io/DRIP-Statistical-Learning/
 * 
 *  - DRIP Fixed Income: Library for Instrument/Trading Conventions, Treasury Futures/Options,
 *      Funding/Forward/Overnight Curves, Multi-Curve Construction/Valuation, Collateral Valuation and XVA
 *      Metric Generation, Calibration and Hedge Attributions, Statistical Curve Construction, Bond RV
 *      Metrics, Stochastic Evolution and Option Pricing, Interest Rate Dynamics and Option Pricing, LMM
 *      Extensions/Calibrations/Greeks, Algorithmic Differentiation, and Asset Backed Models and Analytics.
 * 
 *  - DRIP Asset Allocation: Library for model libraries for MPT framework, Black Litterman Strategy
 *      Incorporator, Holdings Constraint, and Transaction Costs.
 * 
 *  - DRIP Numerical Optimizer: Library for Numerical Optimization and Spline Functionality.
 * 
 *  - DRIP Statistical Learning: Library for Statistical Evaluation and Machine Learning.
 * 
 *  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.
 */

/**
 * FixFloatSwapAnalysis contains an analysis if the correlation and volatility impact on the fix-float Swap.
 * 
 * @author Lakshmi Krishnamurthy
 */

public class FixFloatSwapAnalysis {

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

        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,
            iNumFutures,
            strCurrency
        );

        for (int i = aiDay.length; i < aiDay.length + iNumFutures; ++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 CalibratableComponent[] 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,
                "USD"
            ),
            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;
    }

    private static final FixFloatComponent CreateIRS (
        final JulianDate dtEffective,
        final String strMaturityTenor,
        final ForwardLabel fri,
        final double dblCoupon,
        final String strCurrency)
        throws Exception
    {
        JulianDate dtMaturity = dtEffective.addTenor (strMaturityTenor);

        int iTenorInMonths = Helper.TenorToMonths (fri.tenor());

        UnitCouponAccrualSetting ucasFixed = new UnitCouponAccrualSetting (
            2,
            "Act/360",
            false,
            "Act/360",
            false,
            strCurrency,
            true,
            CompositePeriodBuilder.ACCRUAL_COMPOUNDING_RULE_GEOMETRIC
        );

        ComposableFloatingUnitSetting cfusFloating = new ComposableFloatingUnitSetting (
            fri.tenor(),
            CompositePeriodBuilder.EDGE_DATE_SEQUENCE_REGULAR,
            null,
            fri,
            CompositePeriodBuilder.REFERENCE_PERIOD_IN_ADVANCE,
            0.
        );

        ComposableFixedUnitSetting cfusFixed = new ComposableFixedUnitSetting (
            "6M",
            CompositePeriodBuilder.EDGE_DATE_SEQUENCE_REGULAR,
            null,
            dblCoupon,
            0.,
            strCurrency
        );

        CompositePeriodSetting cpsFloating = new CompositePeriodSetting (
            12 / iTenorInMonths,
            fri.tenor(),
            strCurrency,
            null,
            -1.,
            null,
            null,
            null,
            null
        );

        CompositePeriodSetting cpsFixed = new CompositePeriodSetting (
            2,
            "6M",
            strCurrency,
            null,
            1.,
            null,
            null,
            null,
            null
        );

        CashSettleParams csp = new CashSettleParams (
            0,
            strCurrency,
            0
        );

        List<Integer> lsFixedStreamEdgeDate = CompositePeriodBuilder.RegularEdgeDates (
            dtEffective,
            "6M",
            strMaturityTenor,
            null
        );

        List<Integer> lsFloatingStreamEdgeDate = CompositePeriodBuilder.RegularEdgeDates (
            dtEffective,
            fri.tenor(),
            strMaturityTenor,
            null
        );

        Stream floatingStream = new Stream (
            CompositePeriodBuilder.FloatingCompositeUnit (
                lsFloatingStreamEdgeDate,
                cpsFloating,
                cfusFloating
            )
        );

        Stream fixedStream = new Stream (
            CompositePeriodBuilder.FixedCompositeUnit (
                lsFixedStreamEdgeDate,
                cpsFixed,
                ucasFixed,
                cfusFixed
            )
        );

        FixFloatComponent irs = new FixFloatComponent (
            fixedStream,
            floatingStream,
            csp
        );

        irs.setPrimaryCode ("IRS." + dtMaturity.toString() + "." + strCurrency);

        return irs;
    }

    private static final double RunWithVolCorrelation (
        final FixFloatComponent irs,
        final ValuationParams valParams,
        final CurveSurfaceQuoteContainer mktParams,
        final ForwardLabel fri,
        final double dblBaselineSwapRate,
        final double dblForwardVol,
        final double dblFundingVol,
        final double dblForwardFundingCorr)
        throws Exception
    {
        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)
        );

        Map<String, Double> mapIRSOutput = irs.value (
            valParams,
            null,
            mktParams,
            null
        );

        double dblSwapRate = mapIRSOutput.get ("SwapRate");

        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 (dblSwapRate, 1, 4, 100.) + "% | " +
            org.drip.numerical.common.FormatUtil.FormatDouble (dblSwapRate - dblBaselineSwapRate, 1, 0, 10000.));

        return dblSwapRate;
    }

    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
        );

        FixFloatComponent irs = CreateIRS (
            dtToday.addTenor (strTenor),
            "5Y",
            fri,
            0.05,
            strCurrency
        );

        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\tParSwapRate (%)");

        System.out.println ("\t\tDifference (bp)");

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

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

        double dblBaselineSwapRate = RunWithVolCorrelation (
            irs,
            valParams,
            mktParams,
            fri,
            0.,
            0.,
            0.,
            0.
        );

        for (double dblSigmaFwd : adblSigmaFwd) {
            for (double dblSigmaFwd2DomX : adblSigmaFwd2DomX) {
                for (double dblCorrFwdFwd2DomX : adblCorrFwdFwd2DomX)
                    RunWithVolCorrelation (
                        irs,
                        valParams,
                        mktParams,
                        fri,
                        dblBaselineSwapRate,
                        dblSigmaFwd,
                        dblSigmaFwd2DomX,
                        dblCorrFwdFwd2DomX
                    );
            }
        }
    }
}