CSAFundingRelativeForward.java

package org.drip.sample.piterbarg2010;

import org.drip.exposure.csadynamics.FundingBasisEvolver;
import org.drip.measure.dynamics.*;
import org.drip.numerical.common.FormatUtil;
import org.drip.service.env.EnvManager;

/*
 * -*- mode: java; tab-width: 4; indent-tabs-mode: nil; c-basic-offset: 4 -*-
 */

/*!
 * Copyright (C) 2018 Lakshmi Krishnamurthy
 * Copyright (C) 2017 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.
 */

/**
 * CSAFundingRelativeForward compares the Relative Differences between the CSA and the non-CSA Forward Prices
 *  under a Stochastic Funding Model. The References are:
 *  
 *  - Barden, P. (2009): Equity Forward Prices in the Presence of Funding Spreads, ICBI Conference, Rome.
 *  
 *  - Burgard, C., and M. Kjaer (2009): Modeling and successful Management of Credit Counter-party Risk of
 *      Derivative Portfolios, ICBI Conference, Rome.
 *  
 *  - Gregory, J. (2009): Being Two-faced over Counter-party Credit Risk, Risk 20 (2) 86-90.
 *  
 *  - Johannes, M., and S. Sundaresan (2007): Pricing Collateralized Swaps, Journal of Finance 62 383-410.
 * 
 *  - Piterbarg, V. (2010): Funding Beyond Discounting: Collateral Agreements and Derivatives Pricing, Risk
 *      21 (2) 97-102.
 * 
 * @author Lakshmi Krishnamurthy
 */

public class CSAFundingRelativeForward {

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

        double dblUnderlyingVolatility = 0.3;
        double dblFundingSpreadVolatility = 0.015;
        double dblFundingSpreadMeanReversionRate = 0.05;

        double[] adblCorrelation = new double[] {
            -0.30,
            -0.20,
            -0.10,
             0.00,
             0.10
        };

        int[] aiTenor = new int[] {
             1,
             2,
             3,
             4,
             5,
             6,
             7,
             8,
             9,
            10
        };

        double[][] aadblRelativeDifferenceReconciler = new double[][] {
            { 0.0007,  0.0004,  0.0002,  0.0000, -0.0002},
            { 0.0026,  0.0017,  0.0009,  0.0000, -0.0009},
            { 0.0058,  0.0039,  0.0019,  0.0000, -0.0019},
            { 0.0102,  0.0068,  0.0034,  0.0000, -0.0034},
            { 0.0157,  0.0104,  0.0052,  0.0000, -0.0052},
            { 0.0223,  0.0148,  0.0074,  0.0000, -0.0073},
            { 0.0300,  0.0199,  0.0099,  0.0000, -0.0098},
            { 0.0387,  0.0256,  0.0127,  0.0000, -0.0126},
            { 0.0485,  0.0320,  0.0159,  0.0000, -0.0156},
            { 0.0592,  0.0391,  0.0194,  0.0000, -0.0190}
        };

        DiffusionEvaluatorLogarithmic delUnderlying = DiffusionEvaluatorLogarithmic.Standard (
            0.,
            dblUnderlyingVolatility
        );

        DiffusionEvaluatorMeanReversion demrFundingSpread = DiffusionEvaluatorMeanReversion.Standard (
            dblFundingSpreadMeanReversionRate,
            0.,
            dblFundingSpreadVolatility
        );

        System.out.println();

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

        System.out.println ("\t||         DRIP CSA vs Non CSA Forward Prices          ||");

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

        String strHeader = "\t|| CORR => ";

        for (double dblCorrelation : adblCorrelation)
            strHeader = strHeader + "  " + FormatUtil.FormatDouble (dblCorrelation, 2, 0, 100.) + "%  |";

        System.out.println (strHeader + "|");

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

        for (int iTenor : aiTenor) {
            String strDump = "\t|| " + FormatUtil.FormatDouble (iTenor, 2, 0, 1.) + "Y => ";

            for (double dblCorrelation : adblCorrelation) {
                FundingBasisEvolver fbe = new FundingBasisEvolver (
                    delUnderlying,
                    demrFundingSpread,
                    dblCorrelation
                );

                strDump = strDump + " " + FormatUtil.FormatDouble (fbe.CSANoCSARatio (iTenor + "Y") - 1., 1, 2, 100.) + "% |";
            }

            System.out.println (strDump + "|");
        }

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

        System.out.println();

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

        System.out.println ("\t||     Piterbarg 2010 CSA vs Non CSA Forward Prices    ||");

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

        strHeader = "\t|| CORR => ";

        for (double dblCorrelation : adblCorrelation)
            strHeader = strHeader + "  " + FormatUtil.FormatDouble (dblCorrelation, 2, 0, 100.) + "%  |";

        System.out.println (strHeader + "|");

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

        for (int i = 0; i < aiTenor.length; ++i) {
            String strDump = "\t|| " + FormatUtil.FormatDouble (aiTenor[i], 2, 0, 1.) + "Y => ";

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

            System.out.println (strDump + "|");
        }

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

        System.out.println();
    }
}