@Test
public void consistencyTest() {
final double tol = 1.e-12;
final LocalDate optionExpiry = getNextIMMDate(TRADE_DATE).minusDays(1);
final double timeToExpiry = ACT365F.yearFraction(TRADE_DATE, optionExpiry);
final CDSAnalytic fwdCDX = FACTORY.makeCDX(optionExpiry, Period.ofYears(5));
final CDSAnalytic fwdStartingCDX = fwdCDX.withOffset(timeToExpiry);
final double[] indexPUF = new double[] {0.0556, 0.0582, 0.0771, 0.0652};
final CDSAnalytic[] indexCDS = FACTORY.makeCDX(TRADE_DATE, INDEX_PILLARS);
final IntrinsicIndexDataBundle adjCurves =
PSA.adjustCurves(indexPUF, indexCDS, INDEX_COUPON, YIELD_CURVE, INTRINSIC_DATA);
final double fwdSpread =
INDEX_CAL.defaultAdjustedForwardSpread(
fwdStartingCDX, timeToExpiry, YIELD_CURVE, adjCurves);
final double fwdAnnuity = INDEX_CAL.indexAnnuity(fwdStartingCDX, YIELD_CURVE, adjCurves);
final BlackIndexOptionPricer pricerWithFwd =
new BlackIndexOptionPricer(
fwdCDX, timeToExpiry, YIELD_CURVE, INDEX_COUPON, fwdSpread, fwdAnnuity);
final BlackIndexOptionPricer pricerNoFwd =
new BlackIndexOptionPricer(fwdCDX, timeToExpiry, YIELD_CURVE, INDEX_COUPON, adjCurves);
final boolean[] payer = new boolean[] {true, false};
final double vol = 0.4;
final double strikeSpread = 0.015;
final ISDACompliantYieldCurve fwdYC = YIELD_CURVE.withOffset(timeToExpiry);
final double strikePrice =
CONVERTER.quotedSpreadToPUF(fwdCDX, INDEX_COUPON, fwdYC, strikeSpread);
final IndexOptionStrike exPriceAmount = new ExerciseAmount(strikePrice);
final IndexOptionStrike exSpreadAmount = new SpreadBasedStrike(strikeSpread);
for (int i = 0; i < 2; ++i) {
/** Consistency between option pricing methods */
final double premFromPrice = pricerWithFwd.getOptionPremium(exPriceAmount, vol, payer[i]);
final double premFromSpread = pricerWithFwd.getOptionPremium(exSpreadAmount, vol, payer[i]);
final double premFromPriceBare =
pricerWithFwd.getOptionPriceForPriceQuotedIndex(strikePrice, vol, payer[i]);
final double premFromSpreadBare =
pricerWithFwd.getOptionPriceForSpreadQuotedIndex(strikeSpread, vol, payer[i]);
assertEquals(premFromPrice, premFromSpread, tol);
assertEquals(premFromSpread, premFromPriceBare, tol);
assertEquals(premFromPriceBare, premFromSpreadBare, tol);
/** Consistency between constructors */
final double PremFromPriceNoFwd = pricerNoFwd.getOptionPremium(exPriceAmount, vol, payer[i]);
assertEquals(premFromPrice, PremFromPriceNoFwd, tol);
/** Consistency with implied vol */
final double vol1 =
pricerWithFwd.getImpliedVolatility(exPriceAmount, premFromPrice, payer[i]);
final double vol2 =
pricerWithFwd.getImpliedVolatility(exSpreadAmount, premFromSpread, payer[i]);
final double vol3 =
pricerWithFwd.getImpliedVolForExercisePrice(strikePrice, premFromPriceBare, payer[i]);
final double vol4 =
pricerWithFwd.getImpliedVolForSpreadStrike(strikeSpread, premFromSpreadBare, payer[i]);
assertEquals(vol, vol1, tol);
assertEquals(vol, vol2, tol);
assertEquals(vol, vol3, tol);
assertEquals(vol, vol4, tol);
}
}
@SuppressWarnings("unused")
@Test
public void limitTest() {
final LocalDate optionExpiry = getNextIMMDate(TRADE_DATE).minusDays(1);
final double timeToExpiry = ACT365F.yearFraction(TRADE_DATE, optionExpiry);
final CDSAnalytic fwdCDX = FACTORY.makeCDX(optionExpiry, Period.ofYears(5));
final CDSAnalytic fwdStartingCDX = fwdCDX.withOffset(timeToExpiry);
final double[] indexPUF = new double[] {0.0556, 0.0582, 0.0771, 0.0652};
final CDSAnalytic[] indexCDS = FACTORY.makeCDX(TRADE_DATE, INDEX_PILLARS);
final IntrinsicIndexDataBundle adjCurves =
PSA.adjustCurves(indexPUF, indexCDS, INDEX_COUPON, YIELD_CURVE, INTRINSIC_DATA);
final double fwdSpread =
INDEX_CAL.defaultAdjustedForwardSpread(
fwdStartingCDX, timeToExpiry, YIELD_CURVE, adjCurves);
final double fwdAnnuity = INDEX_CAL.indexAnnuity(fwdStartingCDX, YIELD_CURVE, adjCurves);
final BlackIndexOptionPricer pricerWithFwd =
new BlackIndexOptionPricer(
fwdCDX, timeToExpiry, YIELD_CURVE, INDEX_COUPON, fwdSpread, fwdAnnuity);
final double modStrikeLimit = INDEX_COUPON + fwdCDX.getLGD() / fwdAnnuity;
final double vol = 0.4;
final double payLargeSpLimit =
fwdAnnuity
* BlackFormulaRepository.price(fwdSpread, modStrikeLimit, timeToExpiry, vol, true);
final double recLargeSpLimit =
fwdAnnuity
* BlackFormulaRepository.price(fwdSpread, modStrikeLimit, timeToExpiry, vol, false);
final double largeStrikeSp = 75.0;
final double payLargeStrikeSp =
pricerWithFwd.getOptionPriceForSpreadQuotedIndex(largeStrikeSp, vol, true);
final double recLargeStrikeSp =
pricerWithFwd.getOptionPriceForSpreadQuotedIndex(largeStrikeSp, vol, false);
assertEquals(payLargeSpLimit, payLargeStrikeSp, 1.e-12);
assertEquals(
recLargeSpLimit,
recLargeStrikeSp,
1.e-3); // larger strike spread ends up with failure in root-finding
/** Exception expected */
final double negativeTime = -0.5;
try {
new BlackIndexOptionPricer(
fwdCDX, negativeTime, YIELD_CURVE, INDEX_COUPON, fwdSpread, fwdAnnuity);
throw new RuntimeException();
} catch (final Exception e) {
assertEquals("timeToExpiry must be positive. Value given " + negativeTime, e.getMessage());
}
try {
new BlackIndexOptionPricer(
fwdStartingCDX, timeToExpiry, YIELD_CURVE, INDEX_COUPON, fwdSpread, fwdAnnuity);
throw new RuntimeException();
} catch (final Exception e) {
assertEquals("fwdCDS should be a Forward CDS", e.getMessage());
}
final double negativeCoupon = -150.0 * 1.0e-4;
try {
new BlackIndexOptionPricer(
fwdCDX, timeToExpiry, YIELD_CURVE, negativeCoupon, fwdSpread, fwdAnnuity);
throw new RuntimeException();
} catch (final Exception e) {
assertEquals("indexCoupon must be positive", e.getMessage());
}
final double negativeFwdSp = -0.5;
try {
new BlackIndexOptionPricer(
fwdCDX, timeToExpiry, YIELD_CURVE, INDEX_COUPON, negativeFwdSp, fwdAnnuity);
throw new RuntimeException();
} catch (final Exception e) {
assertEquals("defaultAdjustedFwdSpread must be positive", e.getMessage());
}
final double negativeAnn = -0.3;
try {
new BlackIndexOptionPricer(
fwdCDX, timeToExpiry, YIELD_CURVE, INDEX_COUPON, fwdSpread, negativeAnn);
throw new RuntimeException();
} catch (final Exception e) {
assertEquals("pvFwdAnnuity must be positive", e.getMessage());
}
final double largeAnn = fwdCDX.getProtectionEnd() * 2.0;
try {
new BlackIndexOptionPricer(
fwdCDX, timeToExpiry, YIELD_CURVE, INDEX_COUPON, fwdSpread, largeAnn);
throw new RuntimeException();
} catch (final Exception e) {
assertEquals(
"Value of annuity of "
+ largeAnn
+ " is greater than length (in years) of forward CDS. Annuity should be given for unit notional",
e.getMessage());
}
final double smallStrike = -0.9;
try {
pricerWithFwd.getOptionPriceForPriceQuotedIndex(smallStrike, vol, true);
throw new RuntimeException();
} catch (final Exception e) {
assertTrue(e instanceof IllegalArgumentException);
}
final double largeStrike = 0.9;
try {
pricerWithFwd.getOptionPriceForPriceQuotedIndex(largeStrike, vol, true);
throw new RuntimeException();
} catch (final Exception e) {
assertTrue(e instanceof IllegalArgumentException);
}
try {
pricerWithFwd.getOptionPriceForSpreadQuotedIndex(smallStrike, vol, true);
throw new RuntimeException();
} catch (final Exception e) {
assertTrue(e instanceof IllegalArgumentException);
}
}