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/* -*- mode: c++; tab-width: 4; indent-tabs-mode: nil; c-basic-offset: 4 -*- */
/*
Copyright (C) 2008 Roland Lichters
Copyright (C) 2008, 2009 StatPro Italia srl
Copyright (C) 2009 Jose Aparicio
This file is part of QuantLib, a free-software/open-source library
for financial quantitative analysts and developers - http://quantlib.org/
QuantLib is free software: you can redistribute it and/or modify it
under the terms of the QuantLib license. You should have received a
copy of the license along with this program; if not, please email
<quantlib-dev@lists.sf.net>. The license is also available online at
<http://quantlib.org/license.shtml>.
This program is distributed in the hope that it will be useful, but WITHOUT
ANY WARRANTY; without even the implied warranty of MERCHANTABILITY or FITNESS
FOR A PARTICULAR PURPOSE. See the license for more details.
*/
#include <ql/pricingengines/credit/integralcdsengine.hpp>
#include <ql/instruments/claim.hpp>
#include <ql/termstructures/yieldtermstructure.hpp>
#include <ql/cashflows/fixedratecoupon.hpp>
namespace QuantLib {
IntegralCdsEngine::IntegralCdsEngine(
const Period& step,
const Handle<DefaultProbabilityTermStructure>& probability,
Real recoveryRate,
const Handle<YieldTermStructure>& discountCurve,
boost::optional<bool> includeSettlementDateFlows)
: integrationStep_(step), probability_(probability),
recoveryRate_(recoveryRate), discountCurve_(discountCurve),
includeSettlementDateFlows_(includeSettlementDateFlows) {
registerWith(probability_);
registerWith(discountCurve_);
}
void IntegralCdsEngine::calculate() const {
QL_REQUIRE(integrationStep_ != Period(),
"null period set");
QL_REQUIRE(!discountCurve_.empty(),
"no discount term structure set");
QL_REQUIRE(!probability_.empty(),
"no probability term structure set");
Date today = Settings::instance().evaluationDate();
Date settlementDate = discountCurve_->referenceDate();
// Upfront Flow NPV. Either we are on-the-run (no flow)
// or we are forward start
Real upfPVO1 = 0.0;
if(!arguments_.upfrontPayment->hasOccurred(
settlementDate,
includeSettlementDateFlows_)) {
// date determining the probability survival so we have to pay
// the upfront (did not knock out)
Date effectiveUpfrontDate =
arguments_.protectionStart > probability_->referenceDate() ?
arguments_.protectionStart : probability_->referenceDate();
upfPVO1 =
probability_->survivalProbability(effectiveUpfrontDate) *
discountCurve_->discount(arguments_.upfrontPayment->date());
}
results_.upfrontNPV = upfPVO1 * arguments_.upfrontPayment->amount();
results_.couponLegNPV = 0.0;
results_.defaultLegNPV = 0.0;
for (Size i=0; i<arguments_.leg.size(); ++i) {
if (arguments_.leg[i]->hasOccurred(settlementDate,
includeSettlementDateFlows_))
continue;
boost::shared_ptr<FixedRateCoupon> coupon =
boost::dynamic_pointer_cast<FixedRateCoupon>(arguments_.leg[i]);
// In order to avoid a few switches, we calculate the NPV
// of both legs as a positive quantity. We'll give them
// the right sign at the end.
Date paymentDate = coupon->date(),
startDate = (i == 0 ? arguments_.protectionStart :
coupon->accrualStartDate()),
endDate = coupon->accrualEndDate();
Date effectiveStartDate =
(startDate <= today && today <= endDate) ? today : startDate;
Real couponAmount = coupon->amount();
Probability S = probability_->survivalProbability(paymentDate);
// On one side, we add the fixed rate payments in case of
// survival.
results_.couponLegNPV +=
S * couponAmount * discountCurve_->discount(paymentDate);
// On the other side, we add the payment (and possibly the
// accrual) in case of default.
Period step = integrationStep_;
Date d0 = effectiveStartDate;
Date d1 = std::min(d0 + step, endDate);
Probability P0 = probability_->defaultProbability(d0);
DiscountFactor endDiscount = discountCurve_->discount(paymentDate);
do {
DiscountFactor B =
arguments_.paysAtDefaultTime ?
discountCurve_->discount(d1) :
endDiscount;
Probability P1 = probability_->defaultProbability(d1);
Probability dP = P1 - P0;
// accrual...
if (arguments_.settlesAccrual) {
if (arguments_.paysAtDefaultTime)
results_.couponLegNPV +=
coupon->accruedAmount(d1) * B * dP;
else
results_.couponLegNPV +=
couponAmount * B * dP;
}
// ...and claim.
Real claim = arguments_.claim->amount(d1,
arguments_.notional,
recoveryRate_);
results_.defaultLegNPV += claim * B * dP;
// setup for next time around the loop
P0 = P1;
d0 = d1;
d1 = std::min(d0 + step, endDate);
} while (d0 < endDate);
}
Real upfrontSign = 1.0;
switch (arguments_.side) {
case Protection::Seller:
results_.defaultLegNPV *= -1.0;
break;
case Protection::Buyer:
results_.couponLegNPV *= -1.0;
results_.upfrontNPV *= -1.0;
upfrontSign = -1.0;
break;
default:
QL_FAIL("unknown protection side");
}
results_.value =
results_.defaultLegNPV+results_.couponLegNPV+results_.upfrontNPV;
results_.errorEstimate = Null<Real>();
if (results_.couponLegNPV != 0.0) {
results_.fairSpread =
-results_.defaultLegNPV*arguments_.spread/results_.couponLegNPV;
} else {
results_.fairSpread = Null<Rate>();
}
Real upfrontSensitivity = upfPVO1 * arguments_.notional;
if (upfrontSensitivity != 0.0) {
results_.fairUpfront =
-upfrontSign*(results_.defaultLegNPV + results_.couponLegNPV)
/ upfrontSensitivity;
} else {
results_.fairUpfront = Null<Rate>();
}
static const Rate basisPoint = 1.0e-4;
if (arguments_.spread != 0.0) {
results_.couponLegBPS =
results_.couponLegNPV*basisPoint/arguments_.spread;
} else {
results_.couponLegBPS = Null<Rate>();
}
if (arguments_.upfront && *arguments_.upfront != 0.0) {
results_.upfrontBPS =
results_.upfrontNPV*basisPoint/(*arguments_.upfront);
} else {
results_.upfrontBPS = Null<Rate>();
}
}
}
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