IRFoundationMarginComparison.java

package org.drip.sample.simmcurvature;

import java.util.ArrayList;
import java.util.HashMap;
import java.util.List;
import java.util.Map;

import org.drip.numerical.common.FormatUtil;
import org.drip.service.env.EnvManager;
import org.drip.simm.foundation.MarginEstimationSettings;
import org.drip.simm.margin.RiskClassAggregateIR;
import org.drip.simm.margin.RiskMeasureAggregateIR;
import org.drip.simm.parameters.RiskClassSensitivitySettingsIR;
import org.drip.simm.product.BucketSensitivityIR;
import org.drip.simm.product.RiskClassSensitivityIR;
import org.drip.simm.product.RiskFactorTenorSensitivity;
import org.drip.simm.product.RiskMeasureSensitivityIR;

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

/*!
 * Copyright (C) 2018 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.
 */

/**
 * IRFoundationMarginComparison illustrates the Comparison of the IR Margin Estimates using different Schemes
 *  for Calculating the Position-Bucket Curvature Margin. The References are:
 *  
 *  - Andersen, L. B. G., M. Pykhtin, and A. Sokol (2017): Credit Exposure in the Presence of Initial Margin,
 *      https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2806156, eSSRN.
 *  
 *  - Albanese, C., S. Caenazzo, and O. Frankel (2017): Regression Sensitivities for Initial Margin
 *      Calculations, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2763488, eSSRN.
 *  
 *  - Anfuso, F., D. Aziz, P. Giltinan, and K. Loukopoulus (2017): A Sound Modeling and Back-testing
 *      Framework for Forecasting Initial Margin Requirements,
 *      https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2716279, eSSRN.
 *  
 *  - Caspers, P., P. Giltinan, R. Lichters, and N. Nowaczyk (2017): Forecasting Initial Margin Requirements
 *      - A Model Evaluation https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2911167, eSSRN.
 *  
 *  - International Swaps and Derivatives Association (2017): SIMM v2.0 Methodology,
 *      https://www.isda.org/a/oFiDE/isda-simm-v2.pdf.
 * 
 * @author Lakshmi Krishnamurthy
 */

public class IRFoundationMarginComparison
{

    private static final RiskFactorTenorSensitivity CurveTenorSensitivityMap (
        final double notional)
        throws Exception
    {
        Map<String, Double> tenorSensitivityMap = new HashMap<String, Double>();

        tenorSensitivityMap.put (
            "2W",
            notional * (Math.random() - 0.5)
        );

        tenorSensitivityMap.put (
            "1M",
            notional * (Math.random() - 0.5)
        );

        tenorSensitivityMap.put (
            "3M",
            notional * (Math.random() - 0.5)
        );

        tenorSensitivityMap.put (
            "6M",
            notional * (Math.random() - 0.5)
        );

        tenorSensitivityMap.put (
            "1Y",
            notional * (Math.random() - 0.5)
        );

        tenorSensitivityMap.put (
            "2Y",
            notional * (Math.random() - 0.5)
        );

        tenorSensitivityMap.put (
            "3Y",
            notional * (Math.random() - 0.5)
        );

        tenorSensitivityMap.put (
            "5Y",
            notional * (Math.random() - 0.5)
        );

        tenorSensitivityMap.put (
            "10Y",
            notional * (Math.random() - 0.5)
        );

        tenorSensitivityMap.put (
            "15Y",
            notional * (Math.random() - 0.5)
        );

        tenorSensitivityMap.put (
            "20Y",
            notional * (Math.random() - 0.5)
        );

        tenorSensitivityMap.put (
            "30Y",
            notional * (Math.random() - 0.5)
        );

        return new RiskFactorTenorSensitivity (tenorSensitivityMap);
    }

    private static final BucketSensitivityIR CurrencyBucketSensitivity (
        final String currency,
        final double notional)
        throws Exception
    {
        return new BucketSensitivityIR (
            CurveTenorSensitivityMap (notional),
            CurveTenorSensitivityMap (notional),
            CurveTenorSensitivityMap (notional),
            CurveTenorSensitivityMap (notional),
            CurveTenorSensitivityMap (notional),
            CurveTenorSensitivityMap (notional),
            CurveTenorSensitivityMap (notional)
        );
    }

    private static final void ISDABucketCovarianceMargin (
        final String positionBucketCovarianceScheme,
        final Map<String, BucketSensitivityIR> bucketDeltaSensitivityMap,
        final Map<String, BucketSensitivityIR> bucketVegaSensitivityMap,
        final RiskClassSensitivitySettingsIR riskClassSensitivitySettings,
        final MarginEstimationSettings marginEstimationSettings)
        throws Exception
    {
        RiskClassAggregateIR riskClassAggregate = new RiskClassSensitivityIR (
            new RiskMeasureSensitivityIR (bucketDeltaSensitivityMap),
            new RiskMeasureSensitivityIR (bucketVegaSensitivityMap),
            new RiskMeasureSensitivityIR (bucketVegaSensitivityMap)
        ).aggregate (
            riskClassSensitivitySettings,
            marginEstimationSettings
        );

        RiskMeasureAggregateIR deltaRiskMeasureAggregate = riskClassAggregate.deltaMargin();

        RiskMeasureAggregateIR vegaRiskMeasureAggregate = riskClassAggregate.vegaMargin();

        RiskMeasureAggregateIR curvatureRiskMeasureAggregate = riskClassAggregate.curvatureMargin();

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

        System.out.println ("\t|       " + positionBucketCovarianceScheme + " SBA MARGIN       ||");

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

        System.out.println ("\t|  MEASURE  =>  CORE  | RESIDUAL | TOTAL ||");

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

        System.out.println ("\t|   DELTA   => " +
            FormatUtil.FormatDouble (Math.sqrt (deltaRiskMeasureAggregate.coreSBAVariance()), 5, 0, 1.) +
                " |  " +
            FormatUtil.FormatDouble (Math.sqrt (deltaRiskMeasureAggregate.residualSBAVariance()), 5, 0, 1.) +
                "  |" +
            FormatUtil.FormatDouble (deltaRiskMeasureAggregate.sba(), 5, 0, 1.) + " ||"
        );

        System.out.println ("\t|   VEGA    => " +
            FormatUtil.FormatDouble (Math.sqrt (vegaRiskMeasureAggregate.coreSBAVariance()), 5, 0, 1.) +
                " |  " +
            FormatUtil.FormatDouble (Math.sqrt (vegaRiskMeasureAggregate.residualSBAVariance()), 5, 0, 1.) +
                "  |" +
            FormatUtil.FormatDouble (vegaRiskMeasureAggregate.sba(), 5, 0, 1.) + " ||"
        );

        System.out.println ("\t| CURVATURE => " +
            FormatUtil.FormatDouble (Math.sqrt (curvatureRiskMeasureAggregate.coreSBAVariance()), 5, 0, 1.) +
                " |  " +
            FormatUtil.FormatDouble (Math.sqrt (curvatureRiskMeasureAggregate.residualSBAVariance()), 5, 0, 1.) +
                "  |" +
            FormatUtil.FormatDouble (curvatureRiskMeasureAggregate.sba(), 5, 0, 1.) + " ||"
        );

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

        System.out.println();
    }

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

        String[] currencyArray = {
            "USD",
            "EUR",
            "CNY",
            "INR",
            "JPY"
        };

        double[] notionalArray = {
            100.,
            108.,
            119.,
             49.,
             28.
        };

        Map<String, BucketSensitivityIR> bucketDeltaSensitivityMap = new HashMap<String, BucketSensitivityIR>();

        Map<String, BucketSensitivityIR> bucketVegaSensitivityMap = new HashMap<String, BucketSensitivityIR>();

        for (int currencyIndex = 0; currencyIndex < currencyArray.length; ++currencyIndex)
        {
            bucketDeltaSensitivityMap.put (
                currencyArray[currencyIndex],
                CurrencyBucketSensitivity (
                    currencyArray[currencyIndex],
                    notionalArray[currencyIndex]
                )
            );

            bucketVegaSensitivityMap.put (
                currencyArray[currencyIndex],
                CurrencyBucketSensitivity (
                    currencyArray[currencyIndex],
                    notionalArray[currencyIndex]
                )
            );
        }

        List<String> currencyList = new ArrayList<String>();

        for (String currency : currencyArray)
        {
            currencyList.add (currency);
        }

        RiskClassSensitivitySettingsIR riskClassSensitivitySettings =
            RiskClassSensitivitySettingsIR.ISDA_20 (currencyList);

        ISDABucketCovarianceMargin (
            "           FRTB",
            bucketDeltaSensitivityMap,
            bucketVegaSensitivityMap,
            riskClassSensitivitySettings,
            MarginEstimationSettings.FRTB
                (MarginEstimationSettings.POSITION_PRINCIPAL_COMPONENT_COVARIANCE_ESTIMATOR_ISDA)
        );

        ISDABucketCovarianceMargin (
            "     ISDA DELTA",
            bucketDeltaSensitivityMap,
            bucketVegaSensitivityMap,
            riskClassSensitivitySettings,
            MarginEstimationSettings.ISDADelta
                (MarginEstimationSettings.POSITION_PRINCIPAL_COMPONENT_COVARIANCE_ESTIMATOR_ISDA)
        );

        ISDABucketCovarianceMargin (
            "CORNISH FISCHER",
            bucketDeltaSensitivityMap,
            bucketVegaSensitivityMap,
            riskClassSensitivitySettings,
            MarginEstimationSettings.CornishFischer
                (MarginEstimationSettings.POSITION_PRINCIPAL_COMPONENT_COVARIANCE_ESTIMATOR_FRTB)
        );

        EnvManager.TerminateEnv();
    }
}