jamshidianswaptionengine.cpp

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/* -*- mode: c++; tab-width: 4; indent-tabs-mode: nil; c-basic-offset: 4 -*- */
 
/*
 Copyright (C) 2001, 2002, 2003 Sadruddin Rejeb
 Copyright (C) 2013 Peter Caspers
 
 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/math/solvers1d/brent.hpp>
#include <ql/pricingengines/swaption/jamshidianswaptionengine.hpp>
#include <utility>
 
namespace QuantLib {
 
    class JamshidianSwaptionEngine::rStarFinder {
      public:
        rStarFinder(const ext::shared_ptr<OneFactorAffineModel>& model,
                    Real nominal,
                    Time maturity,
                    Time valueTime,
                    std::vector<Time> fixedPayTimes,
                    const std::vector<Real>& amounts)
        : strike_(nominal), maturity_(maturity), valueTime_(valueTime),
          times_(std::move(fixedPayTimes)), amounts_(amounts), model_(model) {}
 
        Real operator()(Rate x) const {
            Real value = strike_;
            Real B = model_->discountBond(maturity_, valueTime_, x);
            Size size = times_.size();
            for (Size i=0; i<size; i++) {
                Real dbValue =
                    model_->discountBond(maturity_, times_[i], x) / B;
                value -= amounts_[i]*dbValue;
            }
            return value;
        }
      private:
        Real strike_;
        Time maturity_,valueTime_;
        std::vector<Time> times_;
        const std::vector<Real>& amounts_;
        const ext::shared_ptr<OneFactorAffineModel>& model_;
    };
 
    void JamshidianSwaptionEngine::calculate() const {
 
        QL_REQUIRE(arguments_.settlementMethod != Settlement::ParYieldCurve,
                   "cash settled (ParYieldCurve) swaptions not priced with "
                   "JamshidianSwaptionEngine");
 
        QL_REQUIRE(arguments_.exercise->type() == Exercise::European,
                   "cannot use the Jamshidian decomposition "
                   "on exotic swaptions");
 
        QL_REQUIRE(arguments_.swap->spread() == 0.0, "non zero spread (" << arguments_.swap->spread() << ") not allowed");
 
        QL_REQUIRE(arguments_.nominal != Null<Real>(),
                   "non-constant nominals are not supported yet");
 
        QL_REQUIRE(!model_.empty(), "no model specified");
 
        Date referenceDate;
        DayCounter dayCounter;
 
        ext::shared_ptr<TermStructureConsistentModel> tsmodel =
            ext::dynamic_pointer_cast<TermStructureConsistentModel>(*model_);
        if (tsmodel != nullptr) {
            referenceDate = tsmodel->termStructure()->referenceDate();
            dayCounter = tsmodel->termStructure()->dayCounter();
        } else {
            referenceDate = termStructure_->referenceDate();
            dayCounter = termStructure_->dayCounter();
        }
 
        std::vector<Real> amounts(arguments_.fixedCoupons);
        amounts.back() += arguments_.nominal;
 
        Real maturity = dayCounter.yearFraction(referenceDate,
                                                arguments_.exercise->date(0));
 
        std::vector<Time> fixedPayTimes(arguments_.fixedPayDates.size());
        Time valueTime = dayCounter.yearFraction(referenceDate,arguments_.fixedResetDates[0]);
        for (Size i=0; i<fixedPayTimes.size(); i++)
            fixedPayTimes[i] = dayCounter.yearFraction(referenceDate,
                                                       arguments_.fixedPayDates[i]);
 
        rStarFinder finder(*model_, arguments_.nominal, maturity, valueTime,
                           fixedPayTimes, amounts);
        Brent s1d;
        Rate minStrike = -10.0;
        Rate maxStrike = 10.0;
        s1d.setMaxEvaluations(10000);
        s1d.setLowerBound(minStrike);
        s1d.setUpperBound(maxStrike);
        Rate rStar = s1d.solve(finder, 1e-8, 0.05, minStrike, maxStrike);
 
        Option::Type w = arguments_.type==Swap::Payer ? Option::Put : Option::Call;
        Size size = arguments_.fixedCoupons.size();
 
        Real value = 0.0;
        Real B = model_->discountBond(maturity, valueTime, rStar);
        for (Size i=0; i<size; i++) {
            Real fixedPayTime =
                dayCounter.yearFraction(referenceDate,
                                        arguments_.fixedPayDates[i]);
            Real strike = model_->discountBond(maturity,
                                               fixedPayTime,
                                               rStar) / B;
            // Looks like the swaption decomposed into individual options adjusted for maturity. Each individual option is valued by Hull-White (or other one-factor model).
            Real dboValue = model_->discountBondOption(
                                               w, strike, maturity, valueTime,
                                               fixedPayTime);
            value += amounts[i]*dboValue;
        }
        results_.value = value;
    }
 
}