ATMTermStructureSpline.java

package org.drip.sample.option;

import java.util.*;

import org.drip.analytics.date.*;
import org.drip.analytics.definition.NodeStructure;
import org.drip.function.r1tor1.FlatUnivariate;
import org.drip.market.otc.*;
import org.drip.numerical.common.FormatUtil;
import org.drip.param.valuation.*;
import org.drip.pricer.option.BlackScholesAlgorithm;
import org.drip.product.creator.*;
import org.drip.product.definition.CalibratableComponent;
import org.drip.product.option.EuropeanCallPut;
import org.drip.product.rates.*;
import org.drip.service.env.EnvManager;
import org.drip.state.creator.*;
import org.drip.state.discount.MergedDiscountForwardCurve;
import org.drip.state.identifier.ForwardLabel;

/*
 * -*- 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.
 */

/**
 * ATMTermStructureSpline contains an illustration of the Calibration and Extraction of the Deterministic ATM
 *  Price and Volatility Term Structures using Custom Splines. This does not deal with Local Volatility
 *  Surfaces.
 * 
 * @author Lakshmi Krishnamurthy
 */

public class ATMTermStructureSpline {

    private static final FixFloatComponent OTCIRS (
        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.
        );
    }

    /*
     * 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 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) {
            FixFloatComponent irs = OTCIRS (
                dtSpot,
                strCurrency,
                astrMaturityTenor[i],
                adblCoupon[i]
            );

            irs.setPrimaryCode ("IRS." + astrMaturityTenor[i] + "." + strCurrency);

            aIRS[i] = irs;
        }

        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,
            true
        );
    }

    private static final double ATMCall (
        final JulianDate dtMaturity,
        final ValuationParams valParams,
        final MergedDiscountForwardCurve dc,
        final double dblVolatility,
        final String strMeasure)
        throws Exception
    {
        Map<String, Double> mapOptionCalc = new EuropeanCallPut (dtMaturity, 1.).value (
            valParams,
            1.,
            false,
            dc,
            new FlatUnivariate (dblVolatility),
            new BlackScholesAlgorithm()
        );

        return mapOptionCalc.get (strMeasure);
    }

    private static final void InputNodeReplicator (
        final NodeStructure ts,
        final String[] astrMaturityTenor,
        final double[] dblNodeInput)
        throws Exception
    {
        System.out.println ("\n\t" + ts.label());

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

        System.out.println ("\t| TNR =>   CALC  |  INPUT  |");

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

        for (int i = 0; i < astrMaturityTenor.length; ++i)
            System.out.println ("\t| " + astrMaturityTenor[i] + " => " +
                FormatUtil.FormatDouble (ts.node (astrMaturityTenor[i]), 2, 2, 100.) + "% | " +
                FormatUtil.FormatDouble (dblNodeInput[i], 2, 2, 100.) + "% |");

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

    private static final void OffGrid (
        final String strHeader,
        final String[] astrLabel,
        final NodeStructure[] aTS,
        final String[] astrMaturityTenor)
        throws Exception
    {
        System.out.println ("\n\n\t\t" + strHeader + "\n");

        System.out.print ("\t| TNR =>");

        for (int i = 0; i < aTS.length; ++i)
            System.out.print (" " + astrLabel[i] + " | ");

        System.out.println ("\n");

        for (int i = 0; i < astrMaturityTenor.length; ++i) {
            System.out.print ("\t| " + astrMaturityTenor[i] + " =>");

            for (int j = 0; j < aTS.length; ++j)
                System.out.print ("  " + FormatUtil.FormatDouble (aTS[j].node (astrMaturityTenor[i]), 2, 2, 100.) + "%   | ");

            System.out.print ("\n");
        }

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

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

        EnvManager.InitEnv ("");

        JulianDate dtToday = DateUtil.Today();

        ValuationParams valParams = new ValuationParams (
            dtToday,
            dtToday,
            "USD"
        );

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

        MergedDiscountForwardCurve dc = MakeDC (
            dtToday,
            "USD"
        );

        String[] astrMaturityTenor = new String[] {
            "06M", "01Y", "02Y", "03Y", "04Y", "05Y", "07Y", "10Y", "15Y", "20Y"
        };
        double[] adblVolatility = new double[] {
            0.20, 0.23, 0.27, 0.30, 0.33, 0.35, 0.34, 0.29, 0.26, 0.19
        };
        double[] adblCallPrice = new double[adblVolatility.length];
        double[] adblImpliedCallVolatility = new double[adblVolatility.length];

        for (int i = 0; i < astrMaturityTenor.length; ++i) {
            adblCallPrice[i] = ATMCall (
                dtToday.addTenor (astrMaturityTenor[i]),
                valParams,
                dc,
                adblVolatility[i],
                "CallPrice");

            adblImpliedCallVolatility[i] = ATMCall (
                dtToday.addTenor (astrMaturityTenor[i]),
                valParams,
                dc,
                adblVolatility[i],
                "ImpliedCallVolatility");
        }

        NodeStructure tsCallPriceCubicPoly = ScenarioTermStructureBuilder.CubicPolynomialTermStructure (
            "CUBIC_POLY_CALLPRICE_TERMSTRUCTURE",
            dtToday,
            "USD",
            astrMaturityTenor,
            adblCallPrice
        );

        NodeStructure tsCallPriceQuarticPoly = ScenarioTermStructureBuilder.QuarticPolynomialTermStructure (
            "QUARTIC_POLY_CALLPRICE_TERMSTRUCTURE",
            dtToday,
            "USD",
            astrMaturityTenor,
            adblCallPrice
        );

        NodeStructure tsCallPriceKaklisPandelis = ScenarioTermStructureBuilder.KaklisPandelisTermStructure (
            "KAKLIS_PANDELIS_CALLPRICE_TERMSTRUCTURE",
            dtToday,
            "USD",
            astrMaturityTenor,
            adblCallPrice
        );

        NodeStructure tsCallPriceKLKHyperbolic = ScenarioTermStructureBuilder.KLKHyperbolicTermStructure (
            "KLK_HYPERBOLIC_CALLPRICE_TERMSTRUCTURE",
            dtToday,
            "USD",
            astrMaturityTenor,
            adblCallPrice,
            1.
        );

        NodeStructure tsCallPriceKLKRationalLinear = ScenarioTermStructureBuilder.KLKRationalLinearTermStructure (
            "KLK_RATIONAL_LINEAR_CALLPRICE_TERMSTRUCTURE",
            dtToday,
            "USD",
            astrMaturityTenor,
            adblCallPrice,
            1.
        );

        NodeStructure tsCallPriceKLKRationalQuadratic = ScenarioTermStructureBuilder.KLKRationalQuadraticTermStructure (
            "KLK_RATIONAL_QUADRATIC_CALLPRICE_TERMSTRUCTURE",
            dtToday,
            "USD",
            astrMaturityTenor,
            adblCallPrice,
            0.0001
        );

        InputNodeReplicator (
            tsCallPriceCubicPoly,
            astrMaturityTenor,
            adblCallPrice
        );

        NodeStructure tsCallVolatilityCubicPoly = ScenarioTermStructureBuilder.CubicPolynomialTermStructure (
            "CUBIC_POLY_CALLVOL_TERMSTRUCTURE",
            dtToday,
            "USD",
            astrMaturityTenor,
            adblImpliedCallVolatility
        );

        NodeStructure tsCallVolatilityQuarticPoly = ScenarioTermStructureBuilder.QuarticPolynomialTermStructure (
            "QUARTIC_POLY_CALLVOL_TERMSTRUCTURE",
            dtToday,
            "USD",
            astrMaturityTenor,
            adblImpliedCallVolatility
        );

        NodeStructure tsCallVolatilityKaklisPandelis = ScenarioTermStructureBuilder.KaklisPandelisTermStructure (
            "KAKLIS_PANDELIS_CALLVOL_TERMSTRUCTURE",
            dtToday,
            "USD",
            astrMaturityTenor,
            adblImpliedCallVolatility
        );

        NodeStructure tsCallVolatilityKLKHyperbolic = ScenarioTermStructureBuilder.KLKHyperbolicTermStructure (
            "KLK_HYPERBOLIC_CALLVOL_TERMSTRUCTURE",
            dtToday,
            "USD",
            astrMaturityTenor,
            adblImpliedCallVolatility,
            1.
        );

        NodeStructure tsCallVolatilityKLKRationalLinear = ScenarioTermStructureBuilder.KLKRationalLinearTermStructure (
            "KLK_RATIONAL_LINEAR_CALLVOL_TERMSTRUCTURE",
            dtToday,
            "USD",
            astrMaturityTenor,
            adblImpliedCallVolatility,
            1.
        );

        NodeStructure tsCallVolatilityKLKRationalQuadratic = ScenarioTermStructureBuilder.KLKRationalQuadraticTermStructure (
            "KLK_RATIONAL_QUADRATIC_CALLVOL_TERMSTRUCTURE",
            dtToday,
            "USD",
            astrMaturityTenor,
            adblImpliedCallVolatility,
            0.0001
        );

        InputNodeReplicator (
            tsCallVolatilityCubicPoly,
            astrMaturityTenor,
            adblImpliedCallVolatility
        );

        String[] astrOffGridTenor = new String[] {
            "03M", "09M", "18M", "30Y", "42M", "54M", "06Y", "09Y", "12Y", "18Y", "25Y"
        };

        OffGrid (
            "ATM_CALLPRICE_TERM_STRUCTURE",
            new String[] {
                "Cubic Poly", "Quart Poly", "KaklisPand", "KLKHyperbl", "KLKRatlLin", "KLKRatlQua"
            },
            new NodeStructure[] {
                tsCallPriceCubicPoly,
                tsCallPriceQuarticPoly,
                tsCallPriceKaklisPandelis,
                tsCallPriceKLKHyperbolic,
                tsCallPriceKLKRationalLinear,
                tsCallPriceKLKRationalQuadratic
            },
            astrOffGridTenor
        );

        OffGrid (
            "ATM_CALLVOL_TERM_STRUCTURE",
            new String[] {
                "Cubic Poly", "Quart Poly", "KaklisPand", "KLKHyperbl", "KLKRatlLin", "KLKRatlQua"
            },
            new NodeStructure[] {
                tsCallVolatilityCubicPoly,
                tsCallVolatilityQuarticPoly,
                tsCallVolatilityKaklisPandelis,
                tsCallVolatilityKLKHyperbolic,
                tsCallVolatilityKLKRationalLinear,
                tsCallVolatilityKLKRationalQuadratic
            },
            astrOffGridTenor
        );
    }
}