ForwardDerivedBasisSensitivity.java

package org.drip.sample.sensitivity;

import java.util.*;

import org.drip.analytics.date.*;
import org.drip.analytics.support.*;
import org.drip.market.otc.*;
import org.drip.numerical.common.FormatUtil;
import org.drip.param.creator.*;
import org.drip.param.market.CurveSurfaceQuoteContainer;
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.*;
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.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
 * Copyright (C) 2013 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.
 */

/**
 * ForwardDerivedBasisSensitivity contains the sample demonstrating the full functionality behind creating
 *  highly customized spline based forward curves.
 * 
 * The first sample illustrates the creation and usage of the xM-6M Tenor Basis Swap:
 *  - Construct the 6M-xM float-float basis swap.
 *  - Calculate the corresponding starting forward rate off of the discount curve.
 *  - Construct the shape preserving forward curve off of Cubic Polynomial Basis Spline.
 *  - Construct the shape preserving forward curve off of Quartic Polynomial Basis Spline.
 *  - Construct the shape preserving forward curve off of Hyperbolic Tension Based Basis Spline.
 *  - Set the discount curve based component market parameters.
 *  - Set the discount curve + cubic polynomial forward curve based component market parameters.
 *  - Set the discount curve + quartic polynomial forward curve based component market parameters.
 *  - Set the discount curve + hyperbolic tension forward curve based component market parameters.
 *  - Compute the following forward curve metrics for each of cubic polynomial forward, quartic
 *      polynomial forward, and KLK Hyperbolic tension forward curves:
 *      - Reference Basis Par Spread
 *      - Derived Basis Par Spread
 *  - Compare these with a) the forward rate off of the discount curve, b) The LIBOR rate, and c) The
 *      Input Basis Swap Quote.
 * 
 * The second sample illustrates how to build and test the forward curves across various tenor basis. It
 *  shows the following steps:
 *  - Construct the Discount Curve using its instruments and quotes.
 *  - Build and run the sampling for the 1M-6M Tenor Basis Swap from its instruments and quotes.
 *  - Build and run the sampling for the 3M-6M Tenor Basis Swap from its instruments and quotes.
 *  - Build and run the sampling for the 6M-6M Tenor Basis Swap from its instruments and quotes.
 *  - Build and run the sampling for the 12M-6M Tenor Basis Swap from its instruments and quotes.
 * 
 * @author Lakshmi Krishnamurthy
 */

public class ForwardDerivedBasisSensitivity {

    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,
                    aiDay[i] + "D"
                )
            );

        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)
            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[] {
            },
            0,
            strCurrency
        );

        double[] adblDepositQuote = new double[] {
        };

        /*
         * Construct the array of Swap instruments and their quotes.
         */

        double[] adblSwapQuote = new double[] {
            0.0009875,   //  9M
            0.00122,     //  1Y
            0.00223,     // 18M
            0.00383,     //  2Y
            0.00827,     //  3Y
            0.01245,     //  4Y
            0.01605,     //  5Y
            0.02597      // 10Y
        };

        String[] astrSwapManifestMeasure = new String[] {
            "SwapRate",     //  9M
            "SwapRate",     //  1Y
            "SwapRate",     // 18M
            "SwapRate",     //  2Y
            "SwapRate",     //  3Y
            "SwapRate",     //  4Y
            "SwapRate",     //  5Y
            "SwapRate"      // 10Y
        };

        CalibratableComponent[] aSwapComp = SwapInstrumentsFromMaturityTenor (
            dtSpot,
            strCurrency,
            new java.lang.String[] {
                "9M",
                "1Y",
                "18M",
                "2Y",
                "3Y",
                "4Y",
                "5Y",
                "10Y"
            },
            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,
            null,
            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 void ForwardJack (
        final JulianDate dt,
        final Map<String, ForwardCurve> mapForward,
        final String strStartDateTenor)
    {
        for (Map.Entry<String, ForwardCurve> me : mapForward.entrySet())
            System.out.println (me.getKey() + " | " + strStartDateTenor + ": " +
                me.getValue().jackDForwardDManifestMeasure (
                    "PV",
                    dt.addTenor (strStartDateTenor)).displayString()
                );
    }

    private static final void ForwardJack (
        final JulianDate dt,
        final Map<String, ForwardCurve> mapForward)
    {
        ForwardJack (dt, mapForward, "1Y");

        ForwardJack (dt, mapForward, "2Y");

        ForwardJack (dt, mapForward, "3Y");

        ForwardJack (dt, mapForward, "5Y");

        ForwardJack (dt, mapForward, "7Y");
    }

    /*
     * This sample illustrates the creation and usage of the xM-6M Tenor Basis Swap. It shows the following:
     *  - Construct the 6M-xM float-float basis swap.
     *  - Calculate the corresponding starting forward rate off of the discount curve.
     *  - Construct the shape preserving forward curve off of Cubic Polynomial Basis Spline.
     *  - Construct the shape preserving forward curve off of Quartic Polynomial Basis Spline.
     *  - Construct the shape preserving forward curve off of Hyperbolic Tension Based Basis Spline.
     *  - Set the discount curve based component market parameters.
     *  - Set the discount curve + cubic polynomial forward curve based component market parameters.
     *  - Set the discount curve + quartic polynomial forward curve based component market parameters.
     *  - Set the discount curve + hyperbolic tension forward curve based component market parameters.
     *  - Compute the following forward curve metrics for each of cubic polynomial forward, quartic
     *      polynomial forward, and KLK Hyperbolic tension forward curves:
     *      - Reference Basis Par Spread
     *      - Derived Basis Par Spread
     *  - Compare these with a) the forward rate off of the discount curve, b) The LIBOR rate, and c) The
     *      Input Basis Swap Quote.
     * 
     *      USE WITH CARE: This sample ignores errors and does not handle exceptions.
     */

    private static final Map<String, ForwardCurve> xM6MBasisSample (
        final JulianDate dtSpot,
        final String strCurrency,
        final MergedDiscountForwardCurve dc,
        final int iTenorInMonths,
        final String[] astrxM6MFwdTenor,
        final double[] adblxM6MBasisSwapQuote)
        throws Exception
    {
        System.out.println ("------------------------------------------------------------");

        System.out.println (" SPL =>              n=4               |         |         |");

        System.out.println ("---------------------------------------|  LOG DF |  LIBOR  |");

        System.out.println (" MSR =>  RECALC  |  REFEREN |  DERIVED |         |         |");

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

        /*
         * 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
        );

        Map<String, ForwardCurve> mapForward = new HashMap<String, ForwardCurve>();

        /*
         * Construct the shape preserving forward curve off of Quartic Polynomial Basis Spline.
         */

        ForwardCurve fcxMQuartic = ScenarioForwardCurveBuilder.ShapePreservingForwardCurve (
            "QUARTIC_FWD" + strBasisTenor,
            ForwardLabel.Create (
                strCurrency,
                strBasisTenor
            ),
            valParams,
            null,
            mktParams,
            null,
            MultiSegmentSequenceBuilder.BASIS_SPLINE_POLYNOMIAL,
            new PolynomialFunctionSetParams (5),
            aFFC,
            "ReferenceParBasisSpread",
            adblxM6MBasisSwapQuote,
            dblStartingFwd
        );

        mapForward.put (
            " QUARTIC_FWD" + strBasisTenor,
            fcxMQuartic
        );

        /*
         * Set the discount curve + quartic polynomial forward curve based component market parameters.
         */

        CurveSurfaceQuoteContainer mktParamsQuarticFwd = MarketParamsBuilder.Create (
            dc,
            fcxMQuartic,
            null,
            null,
            null,
            null,
            null,
            null
        );

        int i = 0;
        int iFreq = 12 / iTenorInMonths;

        /*
         * Compute the following forward curve metrics for each of cubic polynomial forward, quartic
         *  polynomial forward, and KLK Hyperbolic tension forward curves:
         *  - Reference Basis Par Spread
         *  - Derived Basis Par Spread
         * 
         * Further compare these with a) the forward rate off of the discount curve, b) the LIBOR rate, and
         *  c) Input Basis Swap Quote.
         */

        for (String strMaturityTenor : astrxM6MFwdTenor) {
            int iFwdEndDate = dtSpot.addTenor (strMaturityTenor).julian();

            int iFwdStartDate = dtSpot.addTenor (strMaturityTenor).subtractTenor (strBasisTenor).julian();

            FloatFloatComponent ffc = aFFC[i++];

            CaseInsensitiveTreeMap<Double> mapQuarticValue = ffc.value (
                valParams,
                null,
                mktParamsQuarticFwd,
                null
            );

            System.out.println (" " + strMaturityTenor + " =>  " +
                FormatUtil.FormatDouble (fcxMQuartic.forward (strMaturityTenor), 2, 2, 100.) + "  |  " +
                FormatUtil.FormatDouble (mapQuarticValue.get ("ReferenceParBasisSpread"), 2, 2, 1.) + "  |  " +
                FormatUtil.FormatDouble (mapQuarticValue.get ("DerivedParBasisSpread"), 2, 2, 1.) + "  |  " +
                FormatUtil.FormatDouble (iFreq * java.lang.Math.log (dc.df (iFwdStartDate) / dc.df (iFwdEndDate)), 1, 2, 100.) + "  |  " +
                FormatUtil.FormatDouble (dc.libor (iFwdStartDate, iFwdEndDate), 1, 2, 100.) + "  |  "
            );
        }

        return mapForward;
    }

    /*
     * This sample illustrates how to build and test the forward curves across various tenor basis. It shows
     *  the following steps:
     *  - Construct the Discount Curve using its instruments and quotes.
     *  - Build and run the sampling for the 1M-6M Tenor Basis Swap from its instruments and quotes.
     *  - Build and run the sampling for the 3M-6M Tenor Basis Swap from its instruments and quotes.
     *  - Build and run the sampling for the 6M-6M Tenor Basis Swap from its instruments and quotes.
     *  - Build and run the sampling for the 12M-6M Tenor Basis Swap from its instruments and quotes.
     * 
     *      USE WITH CARE: This sample ignores errors and does not handle exceptions.
     */

    private static final void CustomForwardCurveBuilderSample()
        throws Exception
    {
        /*
         * Initialize the Credit Analytics Library
         */

        EnvManager.InitEnv ("");

        String strCurrency = "AUD";

        JulianDate dtToday = DateUtil.Today().addTenor ("0D");

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

        MergedDiscountForwardCurve dc = MakeDC (
            dtToday,
            strCurrency
        );

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

        System.out.println ("-------------------    1M-6M Basis Swap    -----------------");

        /*
         * Build and run the sampling for the 1M-6M Tenor Basis Swap from its instruments and quotes.
         */

        Map<String, ForwardCurve> mapForward1M6M = xM6MBasisSample (
            dtToday,
            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
            }
        );

        /*
         * Build and run the sampling for the 3M-6M Tenor Basis Swap from its instruments and quotes.
         */

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

        System.out.println ("-------------------    3M-6M Basis Swap    -----------------");

        Map<String, ForwardCurve> mapForward3M6M = xM6MBasisSample (
            dtToday,
            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
            }
        );

        /*
         * Build and run the sampling for the 12M-6M Tenor Basis Swap from its instruments and quotes.
         */

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

        System.out.println ("-------------------   12M-6M Basis Swap    -----------------");

        Map<String, ForwardCurve> mapForward12M6M = xM6MBasisSample (
            dtToday,
            strCurrency,
            dc,
            12,
            new String[] {
                "1Y", "2Y", "3Y", "4Y", "5Y", "6Y", "7Y", "8Y", "9Y", "10Y", "11Y", "12Y", "15Y", "20Y", "25Y", "30Y", "35Y", "40Y"
            },
            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
            }
        );

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

        System.out.println ("------------------------------------------------------- 1M-6M Micro Jack -------------------------------------------------------------------");

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

        ForwardJack (
            dtToday,
            mapForward1M6M
        );

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

        System.out.println ("------------------------------------------------------- 3M-6M Micro Jack -------------------------------------------------------------------");

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

        ForwardJack (
            dtToday,
            mapForward3M6M
        );

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

        System.out.println ("------------------------------------------------------ 12M-6M Micro Jack -------------------------------------------------------------------");

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

        ForwardJack (
            dtToday,
            mapForward12M6M
        );
    }

    public static final void main (
        final String[] astrArgs)
        throws Exception
    {
        CustomForwardCurveBuilderSample();
    }
}