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/* -*- mode: c++; tab-width: 4; indent-tabs-mode: nil; c-basic-offset: 4 -*- */
/*
Copyright (C) 2023 Marcin Rybacki
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
<https://www.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 "toplevelfixture.hpp"
#include "utilities.hpp"
#include <ql/cashflows/equitycashflow.hpp>
#include <ql/currencies/europe.hpp>
#include <ql/indexes/equityindex.hpp>
#include <ql/time/calendars/target.hpp>
#include <ql/quotes/simplequote.hpp>
using namespace QuantLib;
using namespace boost::unit_test_framework;
BOOST_FIXTURE_TEST_SUITE(QuantLibTests, TopLevelFixture)
BOOST_AUTO_TEST_SUITE(EquityCashFlowTests)
struct CommonVars {
Date today;
Calendar calendar;
DayCounter dayCount;
Real notional;
ext::shared_ptr<EquityIndex> equityIndex;
RelinkableHandle<YieldTermStructure> localCcyInterestHandle;
RelinkableHandle<YieldTermStructure> dividendHandle;
RelinkableHandle<YieldTermStructure> quantoCcyInterestHandle;
RelinkableHandle<BlackVolTermStructure> equityVolHandle;
RelinkableHandle<BlackVolTermStructure> fxVolHandle;
RelinkableHandle<Quote> spotHandle;
RelinkableHandle<Quote> correlationHandle;
// utilities
CommonVars() {
calendar = TARGET();
dayCount = Actual365Fixed();
notional = 1.0e7;
today = calendar.adjust(Date(27, January, 2023));
Settings::instance().evaluationDate() = today;
equityIndex = ext::make_shared<EquityIndex>("eqIndex", calendar, EURCurrency(), localCcyInterestHandle,
dividendHandle, spotHandle);
equityIndex->addFixing(Date(5, January, 2023), 9010.0);
equityIndex->addFixing(today, 8690.0);
localCcyInterestHandle.linkTo(flatRate(0.0375, dayCount));
dividendHandle.linkTo(flatRate(0.005, dayCount));
quantoCcyInterestHandle.linkTo(flatRate(0.001, dayCount));
equityVolHandle.linkTo(flatVol(0.4, dayCount));
fxVolHandle.linkTo(flatVol(0.2, dayCount));
spotHandle.linkTo(ext::make_shared<SimpleQuote>(8700.0));
correlationHandle.linkTo(ext::make_shared<SimpleQuote>(0.4));
}
ext::shared_ptr<EquityCashFlow>
createEquityQuantoCashFlow(const ext::shared_ptr<EquityIndex>& index,
const Date& start,
const Date& end,
bool useQuantoPricer = true) {
auto cf = ext::make_shared<EquityCashFlow>(notional, index, start, end, end);
if (useQuantoPricer) {
auto pricer = ext::make_shared<EquityQuantoCashFlowPricer>(
quantoCcyInterestHandle, equityVolHandle, fxVolHandle, correlationHandle);
cf->setPricer(pricer);
}
return cf;
}
ext::shared_ptr<EquityCashFlow>
createEquityQuantoCashFlow(const ext::shared_ptr<EquityIndex>& index,
bool useQuantoPricer = true) {
Date start(5, January, 2023);
Date end(5, April, 2023);
return createEquityQuantoCashFlow(index, start, end, useQuantoPricer);
}
ext::shared_ptr<EquityCashFlow> createEquityQuantoCashFlow(bool useQuantoPricer = true) {
return createEquityQuantoCashFlow(equityIndex, useQuantoPricer);
}
};
void bumpMarketData(CommonVars& vars) {
vars.localCcyInterestHandle.linkTo(flatRate(0.04, vars.dayCount));
vars.dividendHandle.linkTo(flatRate(0.01, vars.dayCount));
vars.quantoCcyInterestHandle.linkTo(flatRate(0.03, vars.dayCount));
vars.equityVolHandle.linkTo(flatVol(0.45, vars.dayCount));
vars.fxVolHandle.linkTo(flatVol(0.25, vars.dayCount));
vars.spotHandle.linkTo(ext::make_shared<SimpleQuote>(8710.0));
}
void checkQuantoCorrection(bool includeDividend, bool bumpData = false) {
const Real tolerance = 1.0e-6;
CommonVars vars;
ext::shared_ptr<EquityIndex> equityIndex =
includeDividend ?
vars.equityIndex :
vars.equityIndex->clone(vars.localCcyInterestHandle, Handle<YieldTermStructure>(),
vars.spotHandle);
auto cf = vars.createEquityQuantoCashFlow(equityIndex);
if (bumpData)
bumpMarketData(vars);
Real strike = vars.equityIndex->fixing(cf->fixingDate());
Real indexStart = vars.equityIndex->fixing(cf->baseDate());
Real time = vars.localCcyInterestHandle->timeFromReference(cf->fixingDate());
Real rf = vars.localCcyInterestHandle->zeroRate(time, Continuous);
Real q = includeDividend ? vars.dividendHandle->zeroRate(time, Continuous) : Real(0.0);
Real eqVol = vars.equityVolHandle->blackVol(cf->fixingDate(), strike);
Real fxVol = vars.fxVolHandle->blackVol(cf->fixingDate(), 1.0);
Real rho = vars.correlationHandle->value();
Real spot = vars.spotHandle->value();
Real quantoForward = spot * std::exp((rf - q - rho * eqVol * fxVol) * time);
Real expectedAmount = (quantoForward / indexStart - 1.0) * vars.notional;
Real actualAmount = cf->amount();
if ((std::fabs(actualAmount - expectedAmount) > tolerance))
BOOST_ERROR("could not replicate equity quanto correction\n"
<< " actual amount: " << actualAmount << "\n"
<< " expected amount: " << expectedAmount << "\n"
<< " index start: " << indexStart << "\n"
<< " index end: " << quantoForward << "\n"
<< " local rate: " << rf << "\n"
<< " equity volatility: " << eqVol << "\n"
<< " FX volatility: " << fxVol << "\n"
<< " correlation: " << rho << "\n"
<< " spot: " << spot << "\n");
}
void checkRaisedError(const ext::shared_ptr<EquityCashFlow>& cf, const std::string& message) {
BOOST_CHECK_EXCEPTION(cf->amount(), Error, ExpectedErrorMessage(message));
}
BOOST_AUTO_TEST_CASE(testSimpleEquityCashFlow) {
BOOST_TEST_MESSAGE("Testing simple equity cash flow...");
const Real tolerance = 1.0e-6;
CommonVars vars;
auto cf = vars.createEquityQuantoCashFlow(false);
Real indexStart = vars.equityIndex->fixing(cf->baseDate());
Real indexEnd = vars.equityIndex->fixing(cf->fixingDate());
Real expectedAmount = (indexEnd / indexStart - 1.0) * vars.notional;
Real actualAmount = cf->amount();
if ((std::fabs(actualAmount - expectedAmount) > tolerance))
BOOST_ERROR("could not replicate simple equity quanto cash flow\n"
<< " actual amount: " << actualAmount << "\n"
<< " expected amount: " << expectedAmount << "\n"
<< " index start: " << indexStart << "\n"
<< " index end: " << indexEnd << "\n");
}
BOOST_AUTO_TEST_CASE(testQuantoCorrection) {
BOOST_TEST_MESSAGE("Testing quanto correction...");
checkQuantoCorrection(true);
checkQuantoCorrection(false);
// Checks whether observers are being notified
// about changes in market data handles.
checkQuantoCorrection(false, true);
}
BOOST_AUTO_TEST_CASE(testErrorWhenBaseDateAfterFixingDate) {
BOOST_TEST_MESSAGE("Testing error when base date after fixing date...");
CommonVars vars;
Date end(5, January, 2023);
Date start(5, April, 2023);
auto cf = vars.createEquityQuantoCashFlow(vars.equityIndex, start, end);
checkRaisedError(cf, "Fixing date cannot fall before base date.");
}
BOOST_AUTO_TEST_CASE(testErrorWhenQuantoCurveHandleIsEmpty) {
BOOST_TEST_MESSAGE("Testing error when quanto currency curve handle is empty...");
CommonVars vars;
auto cf = vars.createEquityQuantoCashFlow();
ext::shared_ptr<YieldTermStructure> yts;
vars.quantoCcyInterestHandle.linkTo(yts);
checkRaisedError(cf, "Quanto currency term structure handle cannot be empty.");
}
BOOST_AUTO_TEST_CASE(testErrorWhenEquityVolHandleIsEmpty) {
BOOST_TEST_MESSAGE("Testing error when equity vol handle is empty...");
CommonVars vars;
auto cf = vars.createEquityQuantoCashFlow();
ext::shared_ptr<BlackVolTermStructure> vol;
vars.equityVolHandle.linkTo(vol);
checkRaisedError(cf, "Equity volatility term structure handle cannot be empty.");
}
BOOST_AUTO_TEST_CASE(testErrorWhenFXVolHandleIsEmpty) {
BOOST_TEST_MESSAGE("Testing error when FX vol handle is empty...");
CommonVars vars;
auto cf = vars.createEquityQuantoCashFlow();
ext::shared_ptr<BlackVolTermStructure> vol;
vars.fxVolHandle.linkTo(vol);
checkRaisedError(cf, "FX volatility term structure handle cannot be empty.");
}
BOOST_AUTO_TEST_CASE(testErrorWhenCorrelationHandleIsEmpty) {
BOOST_TEST_MESSAGE("Testing error when correlation handle is empty...");
CommonVars vars;
auto cf = vars.createEquityQuantoCashFlow();
ext::shared_ptr<Quote> correlation;
vars.correlationHandle.linkTo(correlation);
checkRaisedError(cf, "Correlation handle cannot be empty.");
}
BOOST_AUTO_TEST_CASE(testErrorWhenInconsistentMarketDataReferenceDate) {
BOOST_TEST_MESSAGE("Testing error when market data reference dates are inconsistent...");
CommonVars vars;
auto cf = vars.createEquityQuantoCashFlow();
vars.quantoCcyInterestHandle.linkTo(flatRate(Date(26, January, 2023), 0.02, vars.dayCount));
checkRaisedError(
cf, "Quanto currency term structure, equity and FX volatility need to have the same "
"reference date.");
}
BOOST_AUTO_TEST_SUITE_END()
BOOST_AUTO_TEST_SUITE_END()
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