ForeignCollateralizedZeroCoupon.java

package org.drip.sample.piterbarg2012;

import org.drip.analytics.date.*;
import org.drip.function.r1tor1.*;
import org.drip.product.params.CurrencyPair;
import org.drip.service.env.EnvManager;
import org.drip.state.creator.ScenarioDiscountCurveBuilder;
import org.drip.state.curve.ForeignCollateralizedDiscountCurve;
import org.drip.state.discount.MergedDiscountForwardCurve;
import org.drip.state.fx.FXCurve;
import org.drip.state.identifier.*;
import org.drip.state.nonlinear.*;

/*
 * -*- 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.
 */

/**
 * ForeignCollateralizedZeroCoupon contains an analysis of the correlation and volatility impact on the
 *  single cash flow discount factor of a Foreign Collateralized Zero Coupon.
 * 
 * @author Lakshmi Krishnamurthy
 */

public class ForeignCollateralizedZeroCoupon {
    private static final double ZeroCouponVolCorr (
        final JulianDate dtSpot,
        final CurrencyPair cp,
        final MergedDiscountForwardCurve dcCcyForeignCollatForeign,
        final FXCurve fxCurve,
        final double dblForeignRatesVolatility,
        final double dblFXVolatility,
        final double dblFXForeignRatesCorrelation,
        final JulianDate dtMaturity,
        final double dblBaselinePrice)
        throws Exception
    {
        MergedDiscountForwardCurve dcCcyDomesticCollatForeign = new ForeignCollateralizedDiscountCurve (
            cp.denomCcy(),
            dcCcyForeignCollatForeign,
            fxCurve,
            new FlatForwardVolatilityCurve (
                dtSpot.julian(),
                VolatilityLabel.Standard (CollateralLabel.Standard (cp.numCcy())),
                cp.denomCcy(),
                new int[] {dtSpot.julian()},
                new double[] {dblForeignRatesVolatility}
            ),
            new FlatForwardVolatilityCurve (
                dtSpot.julian(),
                VolatilityLabel.Standard (FXLabel.Standard (cp)),
                cp.denomCcy(),
                new int[] {dtSpot.julian()},
                new double[] {dblFXVolatility}
            ),
            new FlatUnivariate (dblFXForeignRatesCorrelation)
        );

        double dblPrice = dcCcyDomesticCollatForeign.df (dtMaturity);

        System.out.println ("\t[" +
            org.drip.numerical.common.FormatUtil.FormatDouble (dblForeignRatesVolatility, 2, 0, 100.) + "%," +
            org.drip.numerical.common.FormatUtil.FormatDouble (dblFXVolatility, 2, 0, 100.) + "%," +
            org.drip.numerical.common.FormatUtil.FormatDouble (dblFXForeignRatesCorrelation, 2, 0, 100.) + "%] =" +
            org.drip.numerical.common.FormatUtil.FormatDouble (dblPrice, 1, 2, 100.) + " | " +
            org.drip.numerical.common.FormatUtil.FormatDouble (dblPrice - dblBaselinePrice, 1, 0, 10000.)
        );

        return dblPrice;
    }

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

        EnvManager.InitEnv ("");

        JulianDate dtToday = DateUtil.Today();

        String strMaturityTenor = "5Y";
        String strDomesticCurrency = "USD";
        String strForeignCurrency = "JPY";
        double dblForeignCollateralRate = 0.02;
        double dblCollateralizedFXRate = 0.01;

        JulianDate dtZeroCouponMaturity = dtToday.addTenor (strMaturityTenor);

        MergedDiscountForwardCurve dcCcyForeignCollatForeign = ScenarioDiscountCurveBuilder.ExponentiallyCompoundedFlatRate (
            dtToday,
            strForeignCurrency,
            dblForeignCollateralRate
        );

        CurrencyPair cp = CurrencyPair.FromCode (strForeignCurrency + "/" + strDomesticCurrency);

        FXCurve fxCurve = new FlatForwardFXCurve (
            dtToday.julian(),
            cp,
            dblCollateralizedFXRate,
            new int[] {dtToday.julian()},
            new double[] {dblCollateralizedFXRate}
        );

        double dblBaselinePrice = ZeroCouponVolCorr (
            dtToday,
            cp,
            dcCcyForeignCollatForeign,
            fxCurve,
            0.,
            0.,
            0.,
            dtZeroCouponMaturity,
            0.
        );

        double[] adblForeignRatesVol = new double[] {
            0.1, 0.2, 0.3, 0.4, 0.5
        };
        double[] adblFXVol = new double[] {
            0.10, 0.15, 0.20, 0.25, 0.30
        };
        double[] adblForeignRatesFXCorr = new double[] {
            -0.99, -0.50, 0.00, 0.50, 0.99
        };

        System.out.println ("\tPrinting the Zero Coupon Bond Price in Order (Left -> Right):");

        System.out.println ("\t\tPrice (%)");

        System.out.println ("\t\tDifference from Baseline (pt)");

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

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

        for (double dblForeignRatesVol : adblForeignRatesVol) {
            for (double dblFXVol : adblFXVol) {
                for (double dblForeignRatesFXCorr : adblForeignRatesFXCorr)
                    ZeroCouponVolCorr (
                        dtToday,
                        cp,
                        dcCcyForeignCollatForeign,
                        fxCurve,
                        dblForeignRatesVol,
                        dblFXVol,
                        dblForeignRatesFXCorr,
                        dtZeroCouponMaturity,
                        dblBaselinePrice
                    );
            }
        }
    }
}