QuantLib: CDS.cpp

A free/open-source library for quantitative finance Reference manual - version 1.6

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CDS.cpp

This example bootstraps a default-probability curve over a number of CDS and reprices them.

/* -*- mode: c++; tab-width: 4; indent-tabs-mode: nil; c-basic-offset: 4 -*- */
/*
Copyright (C) 2008 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/quantlib.hpp>
#include <boost/timer.hpp>
#include <iostream>
#include <iomanip>
using namespace std;
using namespace QuantLib;
#if defined(QL_ENABLE_SESSIONS)
namespace QuantLib {
Integer sessionId() { return 0; }
}
#endif
int main(int, char* []) {
try {
boost::timer timer;
std::cout << std::endl;
/*********************
*** MARKET DATA ***
*********************/
Calendar calendar = TARGET();
Date todaysDate(15, May, 2007);
// must be a business day
todaysDate = calendar. adjust(todaysDate);
Settings::instance().evaluationDate() = todaysDate;
// dummy curve
boost::shared_ptr<Quote> flatRate(new SimpleQuote(0.01));
Handle<YieldTermStructure> tsCurve(
boost::shared_ptr<FlatForward>(
new FlatForward(todaysDate, Handle<Quote>(flatRate),
Actual365Fixed())));
/*
In Lehmans Brothers "guide to exotic credit derivatives"
p. 32 there's a simple case, zero flat curve with a flat CDS
curve with constant market spreads of 150 bp and RR = 50%
corresponds to a flat 3% hazard rate. The implied 1-year
survival probability is 97.04% and the 2-years is 94.18%
*/
// market
Real recovery_rate = 0.5;
Real quoted_spreads[] = { 0.0150, 0.0150, 0.0150, 0.0150 };
vector<Period> tenors;
tenors.push_back(3*Months);
tenors.push_back(6*Months);
tenors.push_back(1*Years);
tenors.push_back(2*Years);
vector<Date> maturities;
for (Size i=0; i<4; i++) {
maturities.push_back(calendar.adjust(todaysDate + tenors[i],
Following));
}
std::vector<boost::shared_ptr<DefaultProbabilityHelper> > instruments;
for (Size i=0; i<4; i++) {
instruments.push_back(boost::shared_ptr<DefaultProbabilityHelper>(
new SpreadCdsHelper(
Handle<Quote>(boost::shared_ptr<Quote>(
new SimpleQuote(quoted_spreads[i]))),
tenors[i],
0,
calendar,
Quarterly,
Following,
DateGeneration::TwentiethIMM,
Actual365Fixed(),
recovery_rate,
tsCurve)));
}
// Bootstrap hazard rates
boost::shared_ptr<PiecewiseDefaultCurve<HazardRate, BackwardFlat> >
hazardRateStructure(
new PiecewiseDefaultCurve<HazardRate, BackwardFlat>(
todaysDate,
instruments,
Actual365Fixed()));
vector<pair<Date, Real> > hr_curve_data = hazardRateStructure->nodes();
cout << "Calibrated hazard rate values: " << endl ;
for (Size i=0; i<hr_curve_data.size(); i++) {
cout << "hazard rate on " << hr_curve_data[i].first << " is "
<< hr_curve_data[i].second << endl;
}
cout << endl;
cout << "Some survival probability values: " << endl ;
cout << "1Y survival probability: "
<< io::percent(hazardRateStructure->survivalProbability(
todaysDate + 1*Years))
<< endl
<< " expected: "
<< io::percent(0.9704)
<< endl;
cout << "2Y survival probability: "
<< io::percent(hazardRateStructure->survivalProbability(
todaysDate + 2*Years))
<< endl
<< " expected: "
<< io::percent(0.9418)
<< endl;
cout << endl << endl;
// reprice instruments
Real nominal = 1000000.0;
Handle<DefaultProbabilityTermStructure> probability(hazardRateStructure);
boost::shared_ptr<PricingEngine> engine(
new MidPointCdsEngine(probability, recovery_rate, tsCurve));
Schedule cdsSchedule =
MakeSchedule().from(todaysDate).to(maturities[0])
.withFrequency(Quarterly)
.withCalendar(calendar)
.withTerminationDateConvention(Unadjusted)
.withRule(DateGeneration::TwentiethIMM);
CreditDefaultSwap cds_3m(Protection::Seller,
nominal,
quoted_spreads[0],
cdsSchedule,
Following,
Actual365Fixed());
cdsSchedule =
MakeSchedule().from(todaysDate).to(maturities[1])
.withFrequency(Quarterly)
.withCalendar(calendar)
.withTerminationDateConvention(Unadjusted)
.withRule(DateGeneration::TwentiethIMM);
CreditDefaultSwap cds_6m(Protection::Seller,
nominal,
quoted_spreads[1],
cdsSchedule,
Following,
Actual365Fixed());
cdsSchedule =
MakeSchedule().from(todaysDate).to(maturities[2])
.withFrequency(Quarterly)
.withCalendar(calendar)
.withTerminationDateConvention(Unadjusted)
.withRule(DateGeneration::TwentiethIMM);
CreditDefaultSwap cds_1y(Protection::Seller,
nominal,
quoted_spreads[2],
cdsSchedule,
Following,
Actual365Fixed());
cdsSchedule =
MakeSchedule().from(todaysDate).to(maturities[3])
.withFrequency(Quarterly)
.withCalendar(calendar)
.withTerminationDateConvention(Unadjusted)
.withRule(DateGeneration::TwentiethIMM);
CreditDefaultSwap cds_2y(Protection::Seller,
nominal,
quoted_spreads[3],
cdsSchedule,
Following,
Actual365Fixed());
cds_3m.setPricingEngine(engine);
cds_6m.setPricingEngine(engine);
cds_1y.setPricingEngine(engine);
cds_2y.setPricingEngine(engine);
cout << "Repricing of quoted CDSs employed for calibration: " << endl;
cout << "3M fair spread: " << io::rate(cds_3m.fairSpread()) << endl
<< " NPV: " << cds_3m.NPV() << endl
<< " default leg: " << cds_3m.defaultLegNPV() << endl
<< " coupon leg: " << cds_3m.couponLegNPV() << endl
<< endl;
cout << "6M fair spread: " << io::rate(cds_6m.fairSpread()) << endl
<< " NPV: " << cds_6m.NPV() << endl
<< " default leg: " << cds_6m.defaultLegNPV() << endl
<< " coupon leg: " << cds_6m.couponLegNPV() << endl
<< endl;
cout << "1Y fair spread: " << io::rate(cds_1y.fairSpread()) << endl
<< " NPV: " << cds_1y.NPV() << endl
<< " default leg: " << cds_1y.defaultLegNPV() << endl
<< " coupon leg: " << cds_1y.couponLegNPV() << endl
<< endl;
cout << "2Y fair spread: " << io::rate(cds_2y.fairSpread()) << endl
<< " NPV: " << cds_2y.NPV() << endl
<< " default leg: " << cds_2y.defaultLegNPV() << endl
<< " coupon leg: " << cds_2y.couponLegNPV() << endl
<< endl;
cout << endl << endl;
Real seconds = timer.elapsed();
Integer hours = Integer(seconds/3600);
seconds -= hours * 3600;
Integer minutes = Integer(seconds/60);
seconds -= minutes * 60;
cout << "Run completed in ";
if (hours > 0)
cout << hours << " h ";
if (hours > 0 || minutes > 0)
cout << minutes << " m ";
cout << fixed << setprecision(0)
<< seconds << " s" << endl;
return 0;
} catch (exception& e) {
cerr << e.what() << endl;
return 1;
} catch (...) {
cerr << "unknown error" << endl;
return 1;
}
}