ReplicationPortfolioVertex.java

  1. package org.drip.xva.derivative;

  3. /*
  4.  * -*- mode: java; tab-width: 4; indent-tabs-mode: nil; c-basic-offset: 4 -*-
  5.  */

  7. /*!
  8.  * Copyright (C) 2020 Lakshmi Krishnamurthy
  9.  * Copyright (C) 2019 Lakshmi Krishnamurthy
  10.  * Copyright (C) 2018 Lakshmi Krishnamurthy
  11.  * Copyright (C) 2017 Lakshmi Krishnamurthy
  12.  * 
  13.  *  This file is part of DROP, an open-source library targeting analytics/risk, transaction cost analytics,
  14.  *      asset liability management analytics, capital, exposure, and margin analytics, valuation adjustment
  15.  *      analytics, and portfolio construction analytics within and across fixed income, credit, commodity,
  16.  *      equity, FX, and structured products. It also includes auxiliary libraries for algorithm support,
  17.  *      numerical analysis, numerical optimization, spline builder, model validation, statistical learning,
  18.  *      and computational support.
  19.  *  
  20.  *      https://lakshmidrip.github.io/DROP/
  21.  *  
  22.  *  DROP is composed of three modules:
  23.  *  
  24.  *  - DROP Product Core - https://lakshmidrip.github.io/DROP-Product-Core/
  25.  *  - DROP Portfolio Core - https://lakshmidrip.github.io/DROP-Portfolio-Core/
  26.  *  - DROP Computational Core - https://lakshmidrip.github.io/DROP-Computational-Core/
  27.  * 
  28.  *  DROP Product Core implements libraries for the following:
  29.  *  - Fixed Income Analytics
  30.  *  - Loan Analytics
  31.  *  - Transaction Cost Analytics
  32.  * 
  33.  *  DROP Portfolio Core implements libraries for the following:
  34.  *  - Asset Allocation Analytics
  35.  *  - Asset Liability Management Analytics
  36.  *  - Capital Estimation Analytics
  37.  *  - Exposure Analytics
  38.  *  - Margin Analytics
  39.  *  - XVA Analytics
  40.  * 
  41.  *  DROP Computational Core implements libraries for the following:
  42.  *  - Algorithm Support
  43.  *  - Computation Support
  44.  *  - Function Analysis
  45.  *  - Model Validation
  46.  *  - Numerical Analysis
  47.  *  - Numerical Optimizer
  48.  *  - Spline Builder
  49.  *  - Statistical Learning
  50.  * 
  51.  *  Documentation for DROP is Spread Over:
  52.  * 
  53.  *  - Main                     => https://lakshmidrip.github.io/DROP/
  54.  *  - Wiki                     => https://github.com/lakshmiDRIP/DROP/wiki
  55.  *  - GitHub                   => https://github.com/lakshmiDRIP/DROP
  56.  *  - Repo Layout Taxonomy     => https://github.com/lakshmiDRIP/DROP/blob/master/Taxonomy.md
  57.  *  - Javadoc                  => https://lakshmidrip.github.io/DROP/Javadoc/index.html
  58.  *  - Technical Specifications => https://github.com/lakshmiDRIP/DROP/tree/master/Docs/Internal
  59.  *  - Release Versions         => https://lakshmidrip.github.io/DROP/version.html
  60.  *  - Community Credits        => https://lakshmidrip.github.io/DROP/credits.html
  61.  *  - Issues Catalog           => https://github.com/lakshmiDRIP/DROP/issues
  62.  *  - JUnit                    => https://lakshmidrip.github.io/DROP/junit/index.html
  63.  *  - Jacoco                   => https://lakshmidrip.github.io/DROP/jacoco/index.html
  64.  * 
  65.  *  Licensed under the Apache License, Version 2.0 (the "License");
  66.  *      you may not use this file except in compliance with the License.
  67.  *   
  68.  *  You may obtain a copy of the License at
  69.  *      http://www.apache.org/licenses/LICENSE-2.0
  70.  *  
  71.  *  Unless required by applicable law or agreed to in writing, software
  72.  *      distributed under the License is distributed on an "AS IS" BASIS,
  73.  *      WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
  74.  *  
  75.  *  See the License for the specific language governing permissions and
  76.  *      limitations under the License.
  77.  */

  79. /**
  80.  * <i>ReplicationPortfolioVertex</i> contains the Dynamic Replicating Portfolio of the Pay-out using the
  81.  * Assets in the Economy, from the Dealer's View Point. The References are:
  82.  *
  83.  *  <br><br>
  84.  *  <ul>
  85.  *      <li>
  86.  *          Burgard, C., and M. Kjaer (2014): PDE Representations of Derivatives with Bilateral Counter-party
  87.  *              Risk and Funding Costs <i>Journal of Credit Risk</i> <b>7 (3)</b> 1-19
  88.  *      </li>
  89.  *      <li>
  90.  *          Cesari, G., J. Aquilina, N. Charpillon, X. Filipovic, G. Lee, and L. Manda (2009): <i>Modeling,
  91.  *              Pricing, and Hedging Counter-party Credit Exposure - A Technical Guide</i> <b>Springer
  92.  *              Finance</b> New York
  93.  *      </li>
  94.  *      <li>
  95.  *          Gregory, J. (2009): Being Two-faced over Counter-party Credit Risk <i>Risk</i> <b>20 (2)</b>
  96.  *              86-90
  97.  *      </li>
  98.  *      <li>
  99.  *          Li, B., and Y. Tang (2007): <i>Quantitative Analysis, Derivatives Modeling, and Trading
  100.  *              Strategies in the Presence of Counter-party Credit Risk for the Fixed Income Market</i>
  101.  *              <b>World Scientific Publishing</b> Singapore
  102.  *      </li>
  103.  *      <li>
  104.  *          Piterbarg, V. (2010): Funding Beyond Discounting: Collateral Agreements and Derivatives Pricing
  105.  *              <i>Risk</i> <b>21 (2)</b> 97-102
  106.  *      </li>
  107.  *  </ul>
  108.  *
  109.  *  <br><br>
  110.  *  <ul>
  111.  *      <li><b>Module </b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/PortfolioCore.md">Portfolio Core Module</a></li>
  112.  *      <li><b>Library</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/XVAAnalyticsLibrary.md">XVA Analytics Library</a></li>
  113.  *      <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>
  114.  *      <li><b>Package</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/src/main/java/org/drip/xva/derivative/README.md">Burgard Kjaer Dynamic Portfolio Replication</a></li>
  115.  *  </ul>
  116.  * <br><br>
  117.  * 
  118.  * @author Lakshmi Krishnamurthy
  119.  */

  121. public class ReplicationPortfolioVertex
  122. {
  123.     private double _cashAccount = java.lang.Double.NaN;
  124.     private double _positionHoldings = java.lang.Double.NaN;
  125.     private double _clientNumeraireHoldings = java.lang.Double.NaN;
  126.     private double _dealerSeniorNumeraireHoldings = java.lang.Double.NaN;
  127.     private double _dealerSubordinateNumeraireHoldings = java.lang.Double.NaN;

  129.     /**
  130.      * Construct a ReplicationPortfolioVertex Instance without the Zero Recovery Dealer Numeraire
  131.      * 
  132.      * @param positionHoldings The Asset Numeraire Holdings
  133.      * @param dealerSeniorNumeraireHoldings The Dealer Senior Numeraire Holdings
  134.      * @param clientNumeraireHoldings The Client Numeraire Replication Holdings
  135.      * @param cashAccount The Cash Account
  136.      * 
  137.      * @return The ReplicationPortfolioVertex Instance without the Zero Recovery Dealer Numeraire
  138.      */

  140.     public static final ReplicationPortfolioVertex Standard (
  141.         final double positionHoldings,
  142.         final double dealerSeniorNumeraireHoldings,
  143.         final double clientNumeraireHoldings,
  144.         final double cashAccount)
  145.     {
  146.         try
  147.         {
  148.             return new ReplicationPortfolioVertex (
  149.                 positionHoldings,
  150.                 dealerSeniorNumeraireHoldings,
  151.                 0.,
  152.                 clientNumeraireHoldings,
  153.                 cashAccount
  154.             );
  155.         }
  156.         catch (java.lang.Exception e)
  157.         {
  158.             e.printStackTrace();
  159.         }

  161.         return null;
  162.     }

  164.     /**
  165.      * ReplicationPortfolioVertex Constructor
  166.      * 
  167.      * @param positionHoldings The Asset Numeraire Holdings
  168.      * @param dealerSeniorNumeraireHoldings The Dealer Senior Numeraire Holdings
  169.      * @param dealerSubordinateNumeraireHoldings The Dealer Subordinate Numeraire Holdings
  170.      * @param clientNumeraireHoldings The Client Numeraire Holdings
  171.      * @param cashAccount The Cash Account
  172.      * 
  173.      * @throws java.lang.Exception Thrown if the Inputs are Invalid
  174.      */

  176.     public ReplicationPortfolioVertex (
  177.         final double positionHoldings,
  178.         final double dealerSeniorNumeraireHoldings,
  179.         final double dealerSubordinateNumeraireHoldings,
  180.         final double clientNumeraireHoldings,
  181.         final double cashAccount)
  182.         throws java.lang.Exception
  183.     {
  184.         if (!org.drip.numerical.common.NumberUtil.IsValid (_dealerSeniorNumeraireHoldings =
  185.                 dealerSeniorNumeraireHoldings) ||
  186.             !org.drip.numerical.common.NumberUtil.IsValid (_dealerSubordinateNumeraireHoldings =
  187.                 dealerSubordinateNumeraireHoldings) ||
  188.             !org.drip.numerical.common.NumberUtil.IsValid (_clientNumeraireHoldings = clientNumeraireHoldings) ||
  189.             !org.drip.numerical.common.NumberUtil.IsValid (_cashAccount = cashAccount))
  190.         {
  191.             throw new java.lang.Exception ("ReplicationPortfolioVertex Constructor => Invalid Inputs");
  192.         }

  194.         _positionHoldings = positionHoldings;
  195.     }

  197.     /**
  198.      * Retrieve the Number of Position Holdings
  199.      * 
  200.      * @return The Number of Position Holdings
  201.      */

  203.     public double positionHoldings()
  204.     {
  205.         return _positionHoldings;
  206.     }

  208.     /**
  209.      * Retrieve the Number of Dealer Senior Numeraire Holdings
  210.      * 
  211.      * @return The Number of Dealer Senior Numeraire Holdings
  212.      */

  214.     public double dealerSeniorNumeraireHoldings()
  215.     {
  216.         return _dealerSeniorNumeraireHoldings;
  217.     }

  219.     /**
  220.      * Retrieve the Number of Dealer Subordinate Numeraire Holdings
  221.      * 
  222.      * @return The Number of Dealer Subordinate Numeraire Holdings
  223.      */

  225.     public double dealerSubordinateNumeraireHoldings()
  226.     {
  227.         return _dealerSubordinateNumeraireHoldings;
  228.     }

  230.     /**
  231.      * Retrieve the Client Numeraire Holdings
  232.      * 
  233.      * @return The Client Numeraire Holdings
  234.      */

  236.     public double clientNumeraireHoldings()
  237.     {
  238.         return _clientNumeraireHoldings;
  239.     }

  241.     /**
  242.      * Retrieve the Cash Account Amount
  243.      * 
  244.      * @return The Cash Account Amount
  245.      */

  247.     public double cashAccount()
  248.     {
  249.         return _cashAccount;
  250.     }

  252.     /**
  253.      * Compute the Market Value of the Dealer Position Pre-Default
  254.      * 
  255.      * @param marketVertex The Market Vertex
  256.      * 
  257.      * @return The Market Value of the Dealer Position Pre-Default
  258.      * 
  259.      * @throws java.lang.Exception Thrown if the Inputs are Invalid
  260.      */

  262.     public double dealerPreDefaultPositionValue (
  263.         final org.drip.exposure.universe.MarketVertex marketVertex)
  264.         throws java.lang.Exception
  265.     {
  266.         if (null == marketVertex)
  267.         {
  268.             throw new java.lang.Exception
  269.                 ("ReplicationPortfolioVertex::dealerPreDefaultPositionValue => Invalid Inputs");
  270.         }

  272.         org.drip.exposure.universe.MarketVertexEntity dealerMarketVertex = marketVertex.dealer();

  274.         double value = -1. * dealerMarketVertex.seniorFundingReplicator() * _dealerSeniorNumeraireHoldings;

  276.         double dealerSubordinateFundingMarketVertex = dealerMarketVertex.subordinateFundingReplicator();

  278.         if (org.drip.numerical.common.NumberUtil.IsValid (dealerSubordinateFundingMarketVertex))
  279.         {
  280.             value -= dealerSubordinateFundingMarketVertex * _dealerSubordinateNumeraireHoldings;
  281.         }

  283.         return value;
  284.     }

  286.     /**
  287.      * Compute the Market Value of the Dealer Position Post-Default
  288.      * 
  289.      * @param marketVertex The Market Vertex
  290.      * 
  291.      * @return The Market Value of the Dealer Position Post-Default
  292.      * 
  293.      * @throws java.lang.Exception Thrown if the Inputs are Invalid
  294.      */

  296.     public double dealerPostDefaultPositionValue (
  297.         final org.drip.exposure.universe.MarketVertex marketVertex)
  298.         throws java.lang.Exception
  299.     {
  300.         if (null == marketVertex)
  301.         {
  302.             throw new java.lang.Exception
  303.                 ("ReplicationPortfolioVertex::dealerPostDefaultPositionValue => Invalid Inputs");
  304.         }

  306.         org.drip.exposure.universe.MarketVertexEntity dealerMarketVertex = marketVertex.dealer();

  308.         double value = dealerMarketVertex.seniorFundingReplicator() * _dealerSeniorNumeraireHoldings *
  309.             dealerMarketVertex.seniorRecoveryRate();

  311.         double dealerSubordinateFundingMarketVertex = dealerMarketVertex.subordinateFundingReplicator();

  313.         if (org.drip.numerical.common.NumberUtil.IsValid (dealerSubordinateFundingMarketVertex))
  314.         {
  315.             value -= dealerSubordinateFundingMarketVertex * _dealerSubordinateNumeraireHoldings *
  316.                 dealerMarketVertex.subordinateRecoveryRate();
  317.         }

  319.         return value;
  320.     }
  321. }
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