QuantLib: CVAIRS.cpp

A free/open-source library for quantitative finance Reference manual - version 1.20

CVAIRS.cpp

This example shows how to calculate credit value adjustment for an interest rate swap.

/* -*- mode: c++; tab-width: 4; indent-tabs-mode: nil; c-basic-offset: 4 -*- */
/*
Copyright (C) 2015 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/qldefines.hpp>
#ifdef BOOST_MSVC
# include <ql/auto_link.hpp>
#endif
#include <ql/instruments/vanillaswap.hpp>
#include <ql/instruments/makevanillaswap.hpp>
#include <ql/pricingengines/swap/discountingswapengine.hpp>
#include <ql/pricingengines/swap/cvaswapengine.hpp>
#include <ql/termstructures/yield/piecewiseyieldcurve.hpp>
#include <ql/termstructures/yield/ratehelpers.hpp>
#include <ql/termstructures/credit/interpolatedhazardratecurve.hpp>
#include <ql/indexes/ibor/euribor.hpp>
#include <ql/time/calendars/target.hpp>
#include <ql/time/daycounters/actualactual.hpp>
#include <ql/time/daycounters/actual360.hpp>
#include <iostream>
#include <iomanip>
using namespace std;
using namespace QuantLib;
#if defined(QL_ENABLE_SESSIONS)
namespace QuantLib {
ThreadKey sessionId() { return 0; }
}
#endif
/*
This example reproduces Table 2 on page 11 of
A Formula for Interest Rate Swaps Valuation under
Counterparty Risk in presence of Netting Agreements
Damiano Brigo and Massimo Masetti; May 4, 2005
*/
int main(int, char* []) {
try {
std::cout << std::endl;
Calendar calendar = TARGET();
Date todaysDate(10, March, 2004);
// must be a business day
todaysDate = calendar. adjust(todaysDate);
Settings::instance().evaluationDate() = todaysDate;
ext::shared_ptr<IborIndex> yieldIndx(new Euribor3M());
Size tenorsSwapMkt[] = {5, 10, 15, 20, 25, 30};
// rates ignoring counterparty risk:
Rate ratesSwapmkt[] = {.03249, .04074, .04463, .04675, .04775, .04811};
vector<ext::shared_ptr<RateHelper> > swapHelpers;
for(Size i=0; i<sizeof(tenorsSwapMkt)/sizeof(Size); i++)
swapHelpers.push_back(ext::make_shared<SwapRateHelper>(
Handle<Quote>(ext::shared_ptr<Quote>(
new SimpleQuote(ratesSwapmkt[i]))),
tenorsSwapMkt[i] * Years,
TARGET(),
Quarterly,
ModifiedFollowing,
ActualActual(ActualActual::ISDA),
yieldIndx));
ext::shared_ptr<YieldTermStructure> swapTS(
new PiecewiseYieldCurve<Discount,LogLinear>(
2, TARGET(), swapHelpers, ActualActual(ActualActual::ISDA)));
swapTS->enableExtrapolation();
ext::shared_ptr<PricingEngine> riskFreeEngine(
ext::make_shared<DiscountingSwapEngine>(
Handle<YieldTermStructure>(swapTS)));
std::vector<Handle<DefaultProbabilityTermStructure> >
defaultIntensityTS;
Size defaultTenors[] = {0, 12, 36, 60, 84, 120, 180, 240, 300,
360};// months
// Three risk levels:
Real intensitiesLow[] = {0.0036, 0.0036, 0.0065, 0.0099, 0.0111,
0.0177, 0.0177, 0.0177, 0.0177, 0.0177,
0.0177};
Real intensitiesMedium[] = {0.0202, 0.0202, 0.0231, 0.0266, 0.0278,
0.0349, 0.0349, 0.0349, 0.0349, 0.0349,
0.0349};
Real intensitiesHigh[] = {0.0534, 0.0534, 0.0564, 0.06, 0.0614, 0.0696,
0.0696, 0.0696, 0.0696, 0.0696, 0.0696};
// Recovery rates:
Real ctptyRRLow = 0.4, ctptyRRMedium = 0.35, ctptyRRHigh = 0.3;
std::vector<Date> defaultTSDates;
std::vector<Real> intesitiesVLow, intesitiesVMedium, intesitiesVHigh;
for(Size i=0; i<sizeof(defaultTenors)/sizeof(Size); i++) {
defaultTSDates.push_back(TARGET().advance(todaysDate,
Period(defaultTenors[i], Months)));
intesitiesVLow.push_back(intensitiesLow[i]);
intesitiesVMedium.push_back(intensitiesMedium[i]);
intesitiesVHigh.push_back(intensitiesHigh[i]);
}
defaultIntensityTS.push_back(Handle<DefaultProbabilityTermStructure>(
ext::shared_ptr<DefaultProbabilityTermStructure>(
new InterpolatedHazardRateCurve<BackwardFlat>(
defaultTSDates,
intesitiesVLow,
Actual360(),
TARGET()))));
defaultIntensityTS.push_back(Handle<DefaultProbabilityTermStructure>(
ext::shared_ptr<DefaultProbabilityTermStructure>(
new InterpolatedHazardRateCurve<BackwardFlat>(
defaultTSDates,
intesitiesVMedium,
Actual360(),
TARGET()))));
defaultIntensityTS.push_back(Handle<DefaultProbabilityTermStructure>(
ext::shared_ptr<DefaultProbabilityTermStructure>(
new InterpolatedHazardRateCurve<BackwardFlat>(
defaultTSDates,
intesitiesVHigh,
Actual360(),
TARGET()))));
Volatility blackVol = 0.15;
ext::shared_ptr<PricingEngine> ctptySwapCvaLow =
ext::make_shared<CounterpartyAdjSwapEngine>(
Handle<YieldTermStructure>(swapTS),
blackVol,
defaultIntensityTS[0],
ctptyRRLow
);
ext::shared_ptr<PricingEngine> ctptySwapCvaMedium =
ext::make_shared<CounterpartyAdjSwapEngine>(
Handle<YieldTermStructure>(swapTS),
blackVol,
defaultIntensityTS[1],
ctptyRRMedium);
ext::shared_ptr<PricingEngine> ctptySwapCvaHigh =
ext::make_shared<CounterpartyAdjSwapEngine>(
Handle<YieldTermStructure>(swapTS),
blackVol,
defaultIntensityTS[2],
ctptyRRHigh);
defaultIntensityTS[0]->enableExtrapolation();
defaultIntensityTS[1]->enableExtrapolation();
defaultIntensityTS[2]->enableExtrapolation();
// fixed leg
Frequency fixedLegFrequency = Quarterly;
BusinessDayConvention fixedLegConvention = ModifiedFollowing;
DayCounter fixedLegDayCounter = ActualActual(ActualActual::ISDA);
DayCounter floatingLegDayCounter = ActualActual(ActualActual::ISDA);
VanillaSwap::Type swapType =
//VanillaSwap::Receiver ;
VanillaSwap::Payer;
ext::shared_ptr<IborIndex> yieldIndxS(
new Euribor3M(Handle<YieldTermStructure>(swapTS)));
std::vector<VanillaSwap> riskySwaps;
for(Size i=0; i<sizeof(tenorsSwapMkt)/sizeof(Size); i++)
riskySwaps.push_back(MakeVanillaSwap(tenorsSwapMkt[i]*Years,
yieldIndxS,
ratesSwapmkt[i],
0*Days)
.withSettlementDays(2)
.withFixedLegDayCount(fixedLegDayCounter)
.withFixedLegTenor(Period(fixedLegFrequency))
.withFixedLegConvention(fixedLegConvention)
.withFixedLegTerminationDateConvention(fixedLegConvention)
.withFixedLegCalendar(calendar)
.withFloatingLegCalendar(calendar)
.withNominal(100.)
.withType(swapType));
cout << "-- Correction in the contract fix rate in bp --" << endl;
/* The paper plots correction to be substracted, here is printed
with its sign
*/
for(Size i=0; i<riskySwaps.size(); i++) {
cout << fixed << setprecision(3);
cout << setw(4);
riskySwaps[i].setPricingEngine(riskFreeEngine);
// should recover the input here:
Real nonRiskyFair = riskySwaps[i].fairRate();
cout << tenorsSwapMkt[i];
cout << setw(5);
cout << " | " << io::rate(nonRiskyFair);
cout << fixed << setprecision(2);
cout << setw(5);
// Low Risk:
riskySwaps[i].setPricingEngine(ctptySwapCvaLow);
cout << " | " << setw(6)
<< 10000.*(riskySwaps[i].fairRate() - nonRiskyFair);
//cout << " | " << setw(6) << riskySwaps[i].NPV() ;
// Medium Risk:
riskySwaps[i].setPricingEngine(ctptySwapCvaMedium);
cout << " | " << setw(6)
<< 10000.*(riskySwaps[i].fairRate() - nonRiskyFair);
//cout << " | " << setw(6) << riskySwaps[i].NPV() ;
riskySwaps[i].setPricingEngine(ctptySwapCvaHigh);
cout << " | " << setw(6)
<< 10000.*(riskySwaps[i].fairRate() - nonRiskyFair);
//cout << " | " << setw(6) << riskySwaps[i].NPV() ;
cout << endl;
}
cout << endl;
return 0;
} catch (exception& e) {
cerr << e.what() << endl;
return 1;
} catch (...) {
cerr << "unknown error" << endl;
return 1;
}
}