ForwardContract.java
package org.drip.sample.piterbarg2010;
import org.drip.analytics.date.*;
import org.drip.analytics.support.Helper;
import org.drip.numerical.common.FormatUtil;
import org.drip.service.env.EnvManager;
import org.drip.service.template.LatentMarketStateBuilder;
import org.drip.state.discount.*;
/*
* -*- 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.
*/
/**
* ForwardContract examines the Valuation of Forward Contract under CSA and non-CSA Settle Agreements. CSA is
* proxied using the OIS Curve, and non-CSA using the Issuer Hedge Funding Curve. The corresponding
* Convexity Adjustments using Spread/CSA Covariance are also calculated. 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 ForwardContract {
private static final DiscountCurve CSACurve (
final String strCurrency,
final JulianDate dtSpot)
throws Exception
{
String[] astrDepositMaturityTenor = new String[] {
"1D",
// "2D",
// "3D"
};
double[] adblDepositQuote = new double[] {
0.0004, // 1D
// 0.0004, // 2D
// 0.0004 // 3D
};
String[] astrShortEndOISMaturityTenor = new String[] {
"1W",
"2W",
"3W",
"1M"
};
double[] adblShortEndOISQuote = new double[] {
0.00070, // 1W
0.00069, // 2W
0.00078, // 3W
0.00074 // 1M
};
String[] astrOISFuturesEffectiveTenor = new String[] {
"1M",
"2M",
"3M",
"4M",
"5M"
};
String[] astrOISFuturesMaturityTenor = new String[] {
"1M",
"1M",
"1M",
"1M",
"1M"
};
double[] adblOISFuturesQuote = new double[] {
0.00046, // 1M x 1M
0.00016, // 2M x 1M
-0.00007, // 3M x 1M
-0.00013, // 4M x 1M
-0.00014 // 5M x 1M
};
String[] astrLongEndOISMaturityTenor = new String[] {
"15M",
"18M",
"21M",
"02Y",
"03Y",
"04Y",
"05Y",
"06Y",
"07Y",
"08Y",
"09Y",
"10Y",
"11Y",
"12Y",
"15Y",
"20Y",
"25Y",
"30Y"
};
double[] adblLongEndOISQuote = new double[] {
0.00002, // 15M
0.00008, // 18M
0.00021, // 21M
0.00036, // 2Y
0.00127, // 3Y
0.00274, // 4Y
0.00456, // 5Y
0.00647, // 6Y
0.00827, // 7Y
0.00996, // 8Y
0.01147, // 9Y
0.01280, // 10Y
0.01404, // 11Y
0.01516, // 12Y
0.01764, // 15Y
0.01939, // 20Y
0.02003, // 25Y
0.02038 // 30Y
};
return LatentMarketStateBuilder.SmoothOvernightCurve (
dtSpot,
strCurrency,
astrDepositMaturityTenor,
adblDepositQuote,
"Rate",
astrShortEndOISMaturityTenor,
adblShortEndOISQuote,
"SwapRate",
astrOISFuturesEffectiveTenor,
astrOISFuturesMaturityTenor,
adblOISFuturesQuote,
"SwapRate",
astrLongEndOISMaturityTenor,
adblLongEndOISQuote,
"SwapRate"
);
}
private static final DiscountCurve NonCSACurve (
final String strCurrency,
final JulianDate dtSpot)
throws Exception
{
String[] astrDepositMaturityTenor = new String[] {
"01D",
"04D",
"07D",
"14D",
"30D",
"60D"
};
double[] adblDepositQuote = new double[] {
0.0013, // 1D
0.0017, // 2D
0.0017, // 7D
0.0018, // 14D
0.0020, // 30D
0.0023 // 60D
};
double[] adblFuturesQuote = new double[] {
0.0027,
0.0032,
0.0041,
0.0054,
0.0077,
0.0104,
0.0134,
0.0160
};
String[] astrFixFloatMaturityTenor = new String[] {
"04Y",
"05Y",
"06Y",
"07Y",
"08Y",
"09Y",
"10Y",
"11Y",
"12Y",
"15Y",
"20Y",
"25Y",
"30Y",
"40Y",
"50Y"
};
double[] adblFixFloatQuote = new double[] {
0.0166, // 4Y
0.0206, // 5Y
0.0241, // 6Y
0.0269, // 7Y
0.0292, // 8Y
0.0311, // 9Y
0.0326, // 10Y
0.0340, // 11Y
0.0351, // 12Y
0.0375, // 15Y
0.0393, // 20Y
0.0402, // 25Y
0.0407, // 30Y
0.0409, // 40Y
0.0409 // 50Y
};
return LatentMarketStateBuilder.SmoothFundingCurve (
dtSpot,
strCurrency,
astrDepositMaturityTenor,
adblDepositQuote,
"ForwardRate",
adblFuturesQuote,
"ForwardRate",
astrFixFloatMaturityTenor,
adblFixFloatQuote,
"SwapRate"
);
}
public static final void main (
final String[] astrArgs)
throws Exception
{
EnvManager.InitEnv ("");
String strCurrency = "USD";
double dblATMForward = 50.;
double dblCSAVolatility = 0.1;
double dblCSANonCSASpreadVolatility = 0.2;
double dblCSANonCSASpreadCorrelation = 0.2;
JulianDate dtSpot = DateUtil.Today().addBusDays (
0,
strCurrency
);
String[] astrTenor = new String[] {
"1W",
"2W",
"3W",
"1M",
"2M",
"3M",
"6M",
"9M",
"12M",
"18M",
"2Y",
"3Y",
"4Y",
"5Y",
"7Y",
"10Y",
"12Y",
"15Y",
"20Y",
"25Y",
"30Y",
"40Y",
"50Y"
};
DiscountCurve dcOvernight = CSACurve (
strCurrency,
dtSpot
);
DiscountCurve dcFunding = NonCSACurve (
strCurrency,
dtSpot
);
System.out.println();
System.out.println ("\t||-----------------------------------------------||");
System.out.println ("\t|| FORWARD CONTRACT CONVEXITY ADJUSTMENT ||");
System.out.println ("\t||-----------------------------------------------||");
System.out.println ("\t|| L -> R: ||");
System.out.println ("\t|| - Date ||");
System.out.println ("\t|| - Spread Numeraire ||");
System.out.println ("\t|| - Convexity Adjustment ||");
System.out.println ("\t|| - CSA-Funding Convexity Adjustment ||");
System.out.println ("\t||-----------------------------------------------||");
for (String strTenor : astrTenor) {
JulianDate dt = dtSpot.addTenor (strTenor);
double dblTenorToYF = Helper.TenorToYearFraction (strTenor);
double dblSpreadNumeraire = dcFunding.df (dt) / dcOvernight.df (dt);
double dblConvexityAdjustment = dblCSANonCSASpreadCorrelation * dblCSANonCSASpreadVolatility * dblCSAVolatility;
System.out.println ("\t|| " + dt + " | " +
FormatUtil.FormatDouble (dblSpreadNumeraire, 1, 4, 1.) + " | " +
FormatUtil.FormatDouble (dblConvexityAdjustment * dblTenorToYF, 1, 6, 1.) + " | " +
FormatUtil.FormatDouble (dblConvexityAdjustment * dblATMForward * dblSpreadNumeraire * dblTenorToYF, 1, 6, 1.) + " ||"
);
}
System.out.println ("\t||-----------------------------------------------||");
System.out.println();
}
}