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cdsoption.cpp

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

/*
 Copyright (C) 2008 Roland Stamm
 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/experimental/credit/cdsoption.hpp>
#include <ql/experimental/credit/blackcdsoptionengine.hpp>
#include <ql/exercise.hpp>
#include <ql/quotes/simplequote.hpp>
#include <ql/instruments/payoffs.hpp>
#include <ql/termstructures/yieldtermstructure.hpp>
#include <ql/math/distributions/normaldistribution.hpp>
#include <ql/math/solvers1d/brent.hpp>

namespace QuantLib {

    namespace {

        class ImpliedVolHelper {
          public:
            ImpliedVolHelper(
                   const CdsOption& cdsoption,
                   const Handle<DefaultProbabilityTermStructure>& probability,
                   Real recoveryRate,
                   const Handle<YieldTermStructure>& termStructure,
                   Real targetValue)
            : targetValue_(targetValue) {

                vol_ = boost::shared_ptr<SimpleQuote>(new SimpleQuote(0.0));
                Handle<Quote> h(vol_);
                engine_ = boost::shared_ptr<PricingEngine>(
                           new BlackCdsOptionEngine(probability, recoveryRate,
                                                    termStructure, h));
                cdsoption.setupArguments(engine_->getArguments());

                results_ =
                    dynamic_cast<const Instrument::results*>(
                                                       engine_->getResults());
            }
            Real operator()(Volatility x) const {
                vol_->setValue(x);
                engine_->calculate();
                return results_->value-targetValue_;
            }
          private:
            boost::shared_ptr<PricingEngine> engine_;
            Real targetValue_;
            boost::shared_ptr<SimpleQuote> vol_;
            const Instrument::results* results_;
        };

    }


    CdsOption::CdsOption(const boost::shared_ptr<CreditDefaultSwap>& swap,
                         const boost::shared_ptr<Exercise>& exercise,
                         bool knocksOut)
    : Option(boost::shared_ptr<Payoff>(new NullPayoff), exercise),
      swap_(swap), knocksOut_(knocksOut) {
        QL_REQUIRE(swap->side() == Protection::Buyer || knocksOut_,
                   "receiver CDS options must knock out");
        QL_REQUIRE(!swap->upfront(), "underlying must be running-spread only");
        registerWith(swap_);
    }

00081     bool CdsOption::isExpired () const {
        return detail::simple_event(exercise_->dates().back()).hasOccurred();
    }

00085     void CdsOption::setupExpired() const {
        Instrument::setupExpired();
        riskyAnnuity_ = 0.0;
    }

00090     void CdsOption::setupArguments(PricingEngine::arguments* args) const {
        swap_->setupArguments(args);
        Option::setupArguments(args);

        CdsOption::arguments* arguments =
            dynamic_cast<CdsOption::arguments*>(args);

        QL_REQUIRE(arguments != 0, "wrong argument type");

        arguments->swap      = swap_;
        arguments->knocksOut = knocksOut_;
    }

00103     void CdsOption::fetchResults(const PricingEngine::results* r) const {
        Option::fetchResults(r);
        const CdsOption::results* results =
            dynamic_cast<const CdsOption::results*>(r);
        QL_ENSURE(results != 0, "wrong results type");
        riskyAnnuity_ = results->riskyAnnuity;
    }



    Rate CdsOption::atmRate() const{
        return swap_->fairSpread();
    }

    Real CdsOption::riskyAnnuity() const {
        calculate();
        QL_REQUIRE(riskyAnnuity_ != Null<Real>(), "risky annuity not provided");
        return riskyAnnuity_;
    }

    Volatility CdsOption::impliedVolatility(
                   Real targetValue,
                   const Handle<YieldTermStructure>& termStructure,
                   const Handle<DefaultProbabilityTermStructure>& probability,
                   Real recoveryRate,
                   Real accuracy,
                   Size maxEvaluations,
                   Volatility minVol,
                   Volatility maxVol) const {
        calculate();
        QL_REQUIRE(!isExpired(), "instrument expired");

        Volatility guess = 0.10;

        ImpliedVolHelper f(*this, probability, recoveryRate,
                           termStructure, targetValue);
        Brent solver;
        solver.setMaxEvaluations(maxEvaluations);
        return solver.solve(f, accuracy, guess, minVol, maxVol);
    }



    void CdsOption::arguments::validate() const {
        CreditDefaultSwap::arguments::validate();
        Option::arguments::validate();
        QL_REQUIRE(swap, "CDS not set");
        QL_REQUIRE(exercise, "exercise not set");
    }

    void CdsOption::results::reset() {
        Option::results::reset();
        riskyAnnuity = Null<Real>();
    }

}


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