ConvertibleBonds.cpp

This example evaluates convertible bond prices.

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

// the only header you need to use QuantLib
#include <ql/quantlib.hpp>

#ifdef BOOST_MSVC
/* Uncomment the following lines to unmask floating-point
   exceptions. Warning: unpredictable results can arise...

   See http://www.wilmott.com/messageview.cfm?catid=10&threadid=9481
   Is there anyone with a definitive word about this?
*/
// #include <float.h>
// namespace { unsigned int u = _controlfp(_EM_INEXACT, _MCW_EM); }
#endif

#include <boost/timer.hpp>
#include <iostream>
#include <iomanip>

#define LENGTH(a) (sizeof(a)/sizeof(a[0]))

using namespace QuantLib;

#ifdef BOOST_MSVC
#  ifdef QL_ENABLE_THREAD_SAFE_OBSERVER_PATTERN
#    include <ql/auto_link.hpp>
#    define BOOST_LIB_NAME boost_system
#    include <boost/config/auto_link.hpp>
#    undef BOOST_LIB_NAME
#    define BOOST_LIB_NAME boost_thread
#    include <boost/config/auto_link.hpp>
#    undef BOOST_LIB_NAME
#  endif
#endif


#if defined(QL_ENABLE_SESSIONS)
namespace QuantLib {

    Integer sessionId() { return 0; }

}
#endif


int main(int, char* []) {

    try {

        boost::timer timer;
        std::cout << std::endl;

        Option::Type type(Option::Put);
        Real underlying = 36.0;
        Real spreadRate = 0.005;

        Spread dividendYield = 0.02;
        Rate riskFreeRate = 0.06;
        Volatility volatility = 0.20;

        Integer settlementDays = 3;
        Integer length = 5;
        Real redemption = 100.0;
        Real conversionRatio = redemption/underlying; // at the money

        // set up dates/schedules
        Calendar calendar = TARGET();
        Date today = calendar.adjust(Date::todaysDate());

        Settings::instance().evaluationDate() = today;
        Date settlementDate = calendar.advance(today, settlementDays, Days);
        Date exerciseDate = calendar.advance(settlementDate, length, Years);
        Date issueDate = calendar.advance(exerciseDate, -length, Years);

        BusinessDayConvention convention = ModifiedFollowing;

        Frequency frequency = Annual;

        Schedule schedule(issueDate, exerciseDate,
                          Period(frequency), calendar,
                          convention, convention,
                          DateGeneration::Backward, false);

        DividendSchedule dividends;
        CallabilitySchedule callability;

        std::vector<Real> coupons(1, 0.05);

        DayCounter bondDayCount = Thirty360();

        Integer callLength[] = { 2, 4 };  // Call dates, years 2, 4.
        Integer putLength[] = { 3 }; // Put dates year 3

        Real callPrices[] = { 101.5, 100.85 };
        Real putPrices[]= { 105.0 };

        // Load call schedules
        for (Size i=0; i<LENGTH(callLength); i++) {
            callability.push_back(
                   boost::shared_ptr<Callability>(
                       new SoftCallability(Callability::Price(
                                                   callPrices[i],
                                                   Callability::Price::Clean),
                                           schedule.date(callLength[i]),
                                           1.20)));
        }

        for (Size j=0; j<LENGTH(putLength); j++) {
            callability.push_back(
                   boost::shared_ptr<Callability>(
                           new Callability(Callability::Price(
                                                   putPrices[j],
                                                   Callability::Price::Clean),
                                           Callability::Put,
                                           schedule.date(putLength[j]))));
        }

        // Assume dividends are paid every 6 months.
        for (Date d = today + 6*Months; d < exerciseDate; d += 6*Months) {
            dividends.push_back(
                      boost::shared_ptr<Dividend>(new FixedDividend(1.0, d)));
        }

        DayCounter dayCounter = Actual365Fixed();
        Time maturity = dayCounter.yearFraction(settlementDate,
                                                exerciseDate);

        std::cout << "option type = "  << type << std::endl;
        std::cout << "Time to maturity = "        << maturity
                  << std::endl;
        std::cout << "Underlying price = "        << underlying
                  << std::endl;
        std::cout << "Risk-free interest rate = " << io::rate(riskFreeRate)
                  << std::endl;
        std::cout << "Dividend yield = " << io::rate(dividendYield)
                  << std::endl;
        std::cout << "Volatility = " << io::volatility(volatility)
                  << std::endl;
        std::cout << std::endl;

        std::string method;
        std::cout << std::endl ;

        // write column headings
        Size widths[] = { 35, 14, 14 };
        Size totalWidth = widths[0] + widths[1] + widths[2];
        std::string rule(totalWidth, '-'), dblrule(totalWidth, '=');

        std::cout << dblrule << std::endl;
        std::cout << "Tsiveriotis-Fernandes method" << std::endl;
        std::cout << dblrule << std::endl;
        std::cout << std::setw(widths[0]) << std::left << "Tree type"
                  << std::setw(widths[1]) << std::left << "European"
                  << std::setw(widths[1]) << std::left << "American"
                  << std::endl;
        std::cout << rule << std::endl;

        boost::shared_ptr<Exercise> exercise(
                                          new EuropeanExercise(exerciseDate));
        boost::shared_ptr<Exercise> amExercise(
                                          new AmericanExercise(settlementDate,
                                                               exerciseDate));

        Handle<Quote> underlyingH(
            boost::shared_ptr<Quote>(new SimpleQuote(underlying)));

        Handle<YieldTermStructure> flatTermStructure(
            boost::shared_ptr<YieldTermStructure>(
                new FlatForward(settlementDate, riskFreeRate, dayCounter)));

        Handle<YieldTermStructure> flatDividendTS(
            boost::shared_ptr<YieldTermStructure>(
                new FlatForward(settlementDate, dividendYield, dayCounter)));

        Handle<BlackVolTermStructure> flatVolTS(
            boost::shared_ptr<BlackVolTermStructure>(
                new BlackConstantVol(settlementDate, calendar,
                                     volatility, dayCounter)));


        boost::shared_ptr<BlackScholesMertonProcess> stochasticProcess(
                              new BlackScholesMertonProcess(underlyingH,
                                                            flatDividendTS,
                                                            flatTermStructure,
                                                            flatVolTS));

        Size timeSteps = 801;

        Handle<Quote> creditSpread(
                       boost::shared_ptr<Quote>(new SimpleQuote(spreadRate)));

        boost::shared_ptr<Quote> rate(new SimpleQuote(riskFreeRate));

        Handle<YieldTermStructure> discountCurve(
                boost::shared_ptr<YieldTermStructure>(
                    new FlatForward(today, Handle<Quote>(rate), dayCounter)));

        boost::shared_ptr<PricingEngine> engine(
                  new BinomialConvertibleEngine<JarrowRudd>(stochasticProcess,
                                                            timeSteps));

        ConvertibleFixedCouponBond europeanBond(
                            exercise, conversionRatio, dividends, callability,
                            creditSpread, issueDate, settlementDays,
                            coupons, bondDayCount, schedule, redemption);
        europeanBond.setPricingEngine(engine);

        ConvertibleFixedCouponBond americanBond(
                          amExercise, conversionRatio, dividends, callability,
                          creditSpread, issueDate, settlementDays,
                          coupons, bondDayCount, schedule, redemption);
        americanBond.setPricingEngine(engine);

        method = "Jarrow-Rudd";
        europeanBond.setPricingEngine(boost::shared_ptr<PricingEngine>(
                  new BinomialConvertibleEngine<JarrowRudd>(stochasticProcess,
                                                            timeSteps)));
        americanBond.setPricingEngine(boost::shared_ptr<PricingEngine>(
                  new BinomialConvertibleEngine<JarrowRudd>(stochasticProcess,
                                                            timeSteps)));
        std::cout << std::setw(widths[0]) << std::left << method
                  << std::fixed
                  << std::setw(widths[1]) << std::left << europeanBond.NPV()
                  << std::setw(widths[2]) << std::left << americanBond.NPV()
                  << std::endl;

        method = "Cox-Ross-Rubinstein";
        europeanBond.setPricingEngine(boost::shared_ptr<PricingEngine>(
           new BinomialConvertibleEngine<CoxRossRubinstein>(stochasticProcess,
                                                            timeSteps)));
        americanBond.setPricingEngine(boost::shared_ptr<PricingEngine>(
           new BinomialConvertibleEngine<CoxRossRubinstein>(stochasticProcess,
                                                            timeSteps)));
        std::cout << std::setw(widths[0]) << std::left << method
                  << std::fixed
                  << std::setw(widths[1]) << std::left << europeanBond.NPV()
                  << std::setw(widths[2]) << std::left << americanBond.NPV()
                  << std::endl;

        method = "Additive equiprobabilities";
        europeanBond.setPricingEngine(boost::shared_ptr<PricingEngine>(
                   new BinomialConvertibleEngine<AdditiveEQPBinomialTree>(
                                                            stochasticProcess,
                                                            timeSteps)));
        americanBond.setPricingEngine(boost::shared_ptr<PricingEngine>(
                   new BinomialConvertibleEngine<AdditiveEQPBinomialTree>(
                                                            stochasticProcess,
                                                            timeSteps)));
        std::cout << std::setw(widths[0]) << std::left << method
                  << std::fixed
                  << std::setw(widths[1]) << std::left << europeanBond.NPV()
                  << std::setw(widths[2]) << std::left << americanBond.NPV()
                  << std::endl;

        method = "Trigeorgis";
        europeanBond.setPricingEngine(boost::shared_ptr<PricingEngine>(
                  new BinomialConvertibleEngine<Trigeorgis>(stochasticProcess,
                                                            timeSteps)));
        americanBond.setPricingEngine(boost::shared_ptr<PricingEngine>(
                  new BinomialConvertibleEngine<Trigeorgis>(stochasticProcess,
                                                            timeSteps)));
        std::cout << std::setw(widths[0]) << std::left << method
                  << std::fixed
                  << std::setw(widths[1]) << std::left << europeanBond.NPV()
                  << std::setw(widths[2]) << std::left << americanBond.NPV()
                  << std::endl;

        method = "Tian";
        europeanBond.setPricingEngine(boost::shared_ptr<PricingEngine>(
                        new BinomialConvertibleEngine<Tian>(stochasticProcess,
                                                            timeSteps)));
        americanBond.setPricingEngine(boost::shared_ptr<PricingEngine>(
                        new BinomialConvertibleEngine<Tian>(stochasticProcess,
                                                            timeSteps)));
        std::cout << std::setw(widths[0]) << std::left << method
                  << std::fixed
                  << std::setw(widths[1]) << std::left << europeanBond.NPV()
                  << std::setw(widths[2]) << std::left << americanBond.NPV()
                  << std::endl;

        method = "Leisen-Reimer";
        europeanBond.setPricingEngine(boost::shared_ptr<PricingEngine>(
                new BinomialConvertibleEngine<LeisenReimer>(stochasticProcess,
                                                            timeSteps)));
        americanBond.setPricingEngine(boost::shared_ptr<PricingEngine>(
                new BinomialConvertibleEngine<LeisenReimer>(stochasticProcess,
                                                            timeSteps)));
        std::cout << std::setw(widths[0]) << std::left << method
                  << std::fixed
                  << std::setw(widths[1]) << std::left << europeanBond.NPV()
                  << std::setw(widths[2]) << std::left << americanBond.NPV()
                  << std::endl;

        method = "Joshi";
        europeanBond.setPricingEngine(boost::shared_ptr<PricingEngine>(
                      new BinomialConvertibleEngine<Joshi4>(stochasticProcess,
                                                            timeSteps)));
        americanBond.setPricingEngine(boost::shared_ptr<PricingEngine>(
                      new BinomialConvertibleEngine<Joshi4>(stochasticProcess,
                                                            timeSteps)));
        std::cout << std::setw(widths[0]) << std::left << method
                  << std::fixed
                  << std::setw(widths[1]) << std::left << europeanBond.NPV()
                  << std::setw(widths[2]) << std::left << americanBond.NPV()
                  << std::endl;

        std::cout << dblrule << std::endl;

        double seconds = timer.elapsed();
        Integer hours = int(seconds/3600);
        seconds -= hours * 3600;
        Integer minutes = int(seconds/60);
        seconds -= minutes * 60;
        std::cout << " \nRun completed in ";
        if (hours > 0)
            std::cout << hours << " h ";
        if (hours > 0 || minutes > 0)
            std::cout << minutes << " m ";
        std::cout << std::fixed << std::setprecision(0)
                  << seconds << " s\n" << std::endl;

        return 0;
    } catch (std::exception& e) {
        std::cerr << e.what() << std::endl;
        return 1;
    } catch (...) {
        std::cerr << "unknown error" << std::endl;
        return 1;
    }

}