public void testDiscretizationError()
{
// Testing the discretization error of the Heston Hull-White process
DayCounter dc = new Actual360();
Date today = Date.Today;
Settings.Instance.setEvaluationDate(today);
// construct a strange yield curve to check drifts and discounting
// of the joint stochastic process
List <Date> dates = new List <Date>();
List <double> times = new List <double>();
List <double> rates = new List <double>(), divRates = new List <double>();
for (int i = 0; i <= 31; ++i)
{
dates.Add(today + new Period(i, TimeUnit.Years));
// FLOATING_POINT_EXCEPTION
rates.Add(0.04 + 0.0001 * Math.Exp(Math.Sin(i)));
divRates.Add(0.04 + 0.0001 * Math.Exp(Math.Sin(i)));
times.Add(dc.yearFraction(today, dates.Last()));
}
Date maturity = today + new Period(10, TimeUnit.Years);
double v = 0.25;
Handle <Quote> s0 = new Handle <Quote>(new SimpleQuote(100));
SimpleQuote vol = new SimpleQuote(v);
Handle <BlackVolTermStructure> volTS = new Handle <BlackVolTermStructure>(Utilities.flatVol(today, vol, dc));
Handle <YieldTermStructure> rTS = new Handle <YieldTermStructure>(new InterpolatedZeroCurve <Linear>(dates, rates, dc));
Handle <YieldTermStructure> qTS = new Handle <YieldTermStructure>(new InterpolatedZeroCurve <Linear>(dates, divRates, dc));
BlackScholesMertonProcess bsmProcess = new BlackScholesMertonProcess(s0, qTS, rTS, volTS);
HestonProcess hestonProcess = new HestonProcess(rTS, qTS, s0, v * v, 1, v * v, 1e-6, -0.4);
HullWhiteForwardProcess hwProcess = new HullWhiteForwardProcess(rTS, 0.01, 0.01);
hwProcess.setForwardMeasureTime(20.1472222222222222);
double tol = 0.05;
double[] corr = { -0.85, 0.5 };
double[] strike = { 50, 100, 125 };
for (int i = 0; i < corr.Length; ++i)
{
for (int j = 0; j < strike.Length; ++j)
{
StrikedTypePayoff payoff = new PlainVanillaPayoff(Option.Type.Put, strike[j]);
Exercise exercise = new EuropeanExercise(maturity);
VanillaOption optionBsmHW = new VanillaOption(payoff, exercise);
HullWhite hwModel = new HullWhite(rTS, hwProcess.a(), hwProcess.sigma());
optionBsmHW.setPricingEngine(new AnalyticBSMHullWhiteEngine(corr[i], bsmProcess, hwModel));
double expected = optionBsmHW.NPV();
VanillaOption optionHestonHW = new VanillaOption(payoff, exercise);
HybridHestonHullWhiteProcess jointProcess = new HybridHestonHullWhiteProcess(hestonProcess,
hwProcess, corr[i]);
optionHestonHW.setPricingEngine(
new MakeMCHestonHullWhiteEngine <PseudoRandom, Statistics>(jointProcess)
.withSteps(1)
.withAntitheticVariate()
.withAbsoluteTolerance(tol)
.withSeed(42).getAsPricingEngine());
double calculated = optionHestonHW.NPV();
double error = optionHestonHW.errorEstimate();
if ((Math.Abs(calculated - expected) > 3 * error &&
Math.Abs(calculated - expected) > 1e-5))
{
QAssert.Fail("Failed to reproduce discretization error"
+ "\n corr: " + corr[i]
+ "\n strike: " + strike[j]
+ "\n calculated: " + calculated
+ "\n error: " + error
+ "\n expected: " + expected);
}
}
}
}
public void testAnalyticHestonHullWhitePricing()
{
// Testing analytic Heston Hull-White option pricing
DayCounter dc = new Actual360();
Date today = Date.Today;
Settings.Instance.setEvaluationDate(today);
// construct a strange yield curve to check drifts and discounting
// of the joint stochastic process
List <Date> dates = new List <Date>();
List <double> times = new List <double>();
List <double> rates = new List <double>(), divRates = new List <double>();
for (int i = 0; i <= 40; ++i)
{
dates.Add(today + new Period(i, TimeUnit.Years));
// FLOATING_POINT_EXCEPTION
rates.Add(0.03 + 0.0001 * Math.Exp(Math.Sin(i / 4.0)));
divRates.Add(0.02 + 0.0002 * Math.Exp(Math.Sin(i / 3.0)));
times.Add(dc.yearFraction(today, dates.Last()));
}
Date maturity = today + new Period(5, TimeUnit.Years);
Handle <Quote> s0 = new Handle <Quote>(new SimpleQuote(100));
Handle <YieldTermStructure> rTS = new Handle <YieldTermStructure>(new InterpolatedZeroCurve <Linear>(dates, rates, dc));
Handle <YieldTermStructure> qTS = new Handle <YieldTermStructure>(new InterpolatedZeroCurve <Linear>(dates, divRates, dc));
HestonProcess hestonProcess = new HestonProcess(rTS, qTS, s0, 0.08, 1.5, 0.0625, 0.5, -0.8);
HestonModel hestonModel = new HestonModel(hestonProcess);
HullWhiteForwardProcess hwFwdProcess = new HullWhiteForwardProcess(rTS, 0.01, 0.01);
hwFwdProcess.setForwardMeasureTime(dc.yearFraction(today, maturity));
HullWhite hullWhiteModel = new HullWhite(rTS, hwFwdProcess.a(), hwFwdProcess.sigma());
double tol = 0.002;
double[] strike = { 80, 120 };
Option.Type[] types = { Option.Type.Put, Option.Type.Call };
for (int i = 0; i < types.Length; ++i)
{
for (int j = 0; j < strike.Length; ++j)
{
HybridHestonHullWhiteProcess jointProcess = new HybridHestonHullWhiteProcess(hestonProcess,
hwFwdProcess, 0.0, HybridHestonHullWhiteProcess.Discretization.Euler);
StrikedTypePayoff payoff = new PlainVanillaPayoff(types[i], strike[j]);
Exercise exercise = new EuropeanExercise(maturity);
VanillaOption optionHestonHW = new VanillaOption(payoff, exercise);
optionHestonHW.setPricingEngine(new MakeMCHestonHullWhiteEngine <PseudoRandom, Statistics>(jointProcess)
.withSteps(1)
.withAntitheticVariate()
.withControlVariate()
.withAbsoluteTolerance(tol)
.withSeed(42).getAsPricingEngine());
VanillaOption optionPureHeston = new VanillaOption(payoff, exercise);
optionPureHeston.setPricingEngine(new AnalyticHestonHullWhiteEngine(hestonModel, hullWhiteModel, 128));
double calculated = optionHestonHW.NPV();
double error = optionHestonHW.errorEstimate();
double expected = optionPureHeston.NPV();
if (Math.Abs(calculated - expected) > 3 * error &&
Math.Abs(calculated - expected) > tol)
{
QAssert.Fail("Failed to reproduce hw heston vanilla prices"
+ "\n strike: " + strike[j]
+ "\n calculated: " + calculated
+ "\n error: " + error
+ "\n expected: " + expected);
}
}
}
}