CloseOutBilateral.java
package org.drip.xva.definition;
/*
* -*- mode: java; tab-width: 4; indent-tabs-mode: nil; c-basic-offset: 4 -*-
*/
/*!
* Copyright (C) 2020 Lakshmi Krishnamurthy
* Copyright (C) 2019 Lakshmi Krishnamurthy
* Copyright (C) 2018 Lakshmi Krishnamurthy
* Copyright (C) 2017 Lakshmi Krishnamurthy
*
* This file is part of DROP, an open-source library targeting analytics/risk, transaction cost analytics,
* asset liability management analytics, capital, exposure, and margin analytics, valuation adjustment
* analytics, and portfolio construction analytics within and across fixed income, credit, commodity,
* equity, FX, and structured products. It also includes auxiliary libraries for algorithm support,
* numerical analysis, numerical optimization, spline builder, model validation, statistical learning,
* and computational support.
*
* https://lakshmidrip.github.io/DROP/
*
* DROP is composed of three modules:
*
* - DROP Product Core - https://lakshmidrip.github.io/DROP-Product-Core/
* - DROP Portfolio Core - https://lakshmidrip.github.io/DROP-Portfolio-Core/
* - DROP Computational Core - https://lakshmidrip.github.io/DROP-Computational-Core/
*
* DROP Product Core implements libraries for the following:
* - Fixed Income Analytics
* - Loan Analytics
* - Transaction Cost Analytics
*
* DROP Portfolio Core implements libraries for the following:
* - Asset Allocation Analytics
* - Asset Liability Management Analytics
* - Capital Estimation Analytics
* - Exposure Analytics
* - Margin Analytics
* - XVA Analytics
*
* DROP Computational Core implements libraries for the following:
* - Algorithm Support
* - Computation Support
* - Function Analysis
* - Model Validation
* - Numerical Analysis
* - Numerical Optimizer
* - Spline Builder
* - Statistical Learning
*
* Documentation for DROP is Spread Over:
*
* - Main => https://lakshmidrip.github.io/DROP/
* - Wiki => https://github.com/lakshmiDRIP/DROP/wiki
* - GitHub => https://github.com/lakshmiDRIP/DROP
* - Repo Layout Taxonomy => https://github.com/lakshmiDRIP/DROP/blob/master/Taxonomy.md
* - Javadoc => https://lakshmidrip.github.io/DROP/Javadoc/index.html
* - Technical Specifications => https://github.com/lakshmiDRIP/DROP/tree/master/Docs/Internal
* - Release Versions => https://lakshmidrip.github.io/DROP/version.html
* - Community Credits => https://lakshmidrip.github.io/DROP/credits.html
* - Issues Catalog => https://github.com/lakshmiDRIP/DROP/issues
* - JUnit => https://lakshmidrip.github.io/DROP/junit/index.html
* - Jacoco => https://lakshmidrip.github.io/DROP/jacoco/index.html
*
* 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.
*/
/**
* <i>CloseOutBilateral</i> implements the (2002) ISDA Master Agreement Bilateral Close Out Scheme to be
* applied to the MTM at the Dealer/Client Default. The References are:
*
* <br><br>
* <ul>
* <li>
* Burgard, C., and M. Kjaer (2013): Funding Strategies, Funding Costs <i>Risk</i> <b>24 (12)</b>
* 82-87
* </li>
* <li>
* Burgard, C., and M. Kjaer (2014): PDE Representations of Derivatives with Bilateral Counter-party
* Risk and Funding Costs <i>Journal of Credit Risk</i> <b>7 (3)</b> 1-19
* </li>
* <li>
* Cesari, G., J. Aquilina, N. Charpillon, X. Filipovic, G. Lee, and L. Manda (2009): <i>Modeling,
* Pricing, and Hedging Counter-party Credit Exposure - A Technical Guide</i> <b>Springer
* Finance</b> New York
* </li>
* <li>
* Gregory, J. (2009): Being Two-faced over Counter-party Credit Risk <i>Risk</i> <b>20 (2)</b>
* 86-90
* </li>
* <li>
* Piterbarg, V. (2010): Funding Beyond Discounting: Collateral Agreements and Derivatives Pricing
* <i>Risk</i> <b>21 (2)</b> 97-102
* </li>
* </ul>
*
* <br><br>
* <ul>
* <li><b>Module </b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/PortfolioCore.md">Portfolio Core Module</a></li>
* <li><b>Library</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/XVAAnalyticsLibrary.md">XVA Analytics Library</a></li>
* <li><b>Project</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/src/main/java/org/drip/xva/README.md">Valuation Adjustments that account for Collateral, CC Credit/Debt and Funding Overhead</a></li>
* <li><b>Package</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/src/main/java/org/drip/xva/definition/README.md">XVA Definition - Close Out, Universe</a></li>
* </ul>
* <br><br>
*
* @author Lakshmi Krishnamurthy
*/
public class CloseOutBilateral extends org.drip.xva.definition.CloseOut
{
private double _clientRecovery = java.lang.Double.NaN;;
private double _dealerSeniorFundingRecovery = java.lang.Double.NaN;
/**
* Generate the Close Out Bilateral Instance from the Market Vertex
*
* @param marketVertex The Market Vertex Instance
*
* @return The Close Out Bilateral Instance from the Market Vertex
*/
public static final CloseOutBilateral Market (
final org.drip.exposure.universe.MarketVertex marketVertex)
{
if (null == marketVertex)
{
return null;
}
try
{
return new CloseOutBilateral (
marketVertex.dealer().seniorRecoveryRate(),
marketVertex.client().seniorRecoveryRate()
);
}
catch (java.lang.Exception e)
{
e.printStackTrace();
}
return null;
}
/**
* CloseOutBilateral Constructor
*
* @param dealerSeniorFundingRecovery The Dealer Senior Funding Recovery Rate
* @param clientRecovery Client Recovery Rate
*
* @throws java.lang.Exception Thrown if the Inputs are Invalid
*/
public CloseOutBilateral (
final double dealerSeniorFundingRecovery,
final double clientRecovery)
throws java.lang.Exception
{
if (!org.drip.numerical.common.NumberUtil.IsValid (_dealerSeniorFundingRecovery =
dealerSeniorFundingRecovery) ||
!org.drip.numerical.common.NumberUtil.IsValid (_clientRecovery = clientRecovery))
{
throw new java.lang.Exception ("CloseOutBilateral Constructor => Invalid Inputs");
}
}
/**
* Retrieve the Dealer Senior Funding Recovery Rate
*
* @return The Dealer Senior Funding Recovery Rate
*/
public double dealerSeniorFundingRecovery()
{
return _dealerSeniorFundingRecovery;
}
/**
* Retrieve the Client Recovery Rate
*
* @return The Client Recovery Rate
*/
public double clientRecovery()
{
return _clientRecovery;
}
@Override public double dealerDefault (
final double uncollateralizedExposure,
final double collateralAmount)
throws java.lang.Exception
{
if (!org.drip.numerical.common.NumberUtil.IsValid (uncollateralizedExposure) ||
!org.drip.numerical.common.NumberUtil.IsValid (collateralAmount))
{
throw new java.lang.Exception ("CloseOutBilateral::dealerDefault => Invalid Inputs");
}
double collateralizedExposure = uncollateralizedExposure - collateralAmount;
return (collateralizedExposure > 0. ? collateralizedExposure : 0.) + _dealerSeniorFundingRecovery *
(collateralizedExposure < 0. ? collateralizedExposure : 0.) + collateralAmount;
}
@Override public double clientDefault (
final double uncollateralizedExposure,
final double collateralAmount)
throws java.lang.Exception
{
if (!org.drip.numerical.common.NumberUtil.IsValid (uncollateralizedExposure) ||
!org.drip.numerical.common.NumberUtil.IsValid (collateralAmount))
{
throw new java.lang.Exception ("CloseOutBilateral::clientDefault => Invalid Inputs");
}
double clientCollateralizedExposure = uncollateralizedExposure - collateralAmount;
return _clientRecovery * (clientCollateralizedExposure > 0. ? clientCollateralizedExposure : 0.) +
(clientCollateralizedExposure < 0. ? clientCollateralizedExposure : 0.) + collateralAmount;
}
}