public void testCatBondInDoomScenario()
{
// Testing floating-rate cat bond in a doom scenario (certain default)
CommonVars vars = new CommonVars();
Date today = new Date(22, Month.November, 2004);
Settings.setEvaluationDate(today);
int settlementDays = 1;
Handle <YieldTermStructure> riskFreeRate = new Handle <YieldTermStructure>(Utilities.flatRate(today, 0.025, new Actual360()));
Handle <YieldTermStructure> discountCurve = new Handle <YieldTermStructure>(Utilities.flatRate(today, 0.03, new Actual360()));
IborIndex index = new USDLibor(new Period(6, TimeUnit.Months), riskFreeRate);
int fixingDays = 1;
double tolerance = 1.0e-6;
IborCouponPricer pricer = new BlackIborCouponPricer(new Handle <OptionletVolatilityStructure>());
Schedule sch = new Schedule(new Date(30, Month.November, 2004),
new Date(30, Month.November, 2008),
new Period(Frequency.Semiannual),
new UnitedStates(UnitedStates.Market.GovernmentBond),
BusinessDayConvention.ModifiedFollowing, BusinessDayConvention.ModifiedFollowing,
DateGeneration.Rule.Backward, false);
List <KeyValuePair <Date, double> > events = new List <KeyValuePair <Date, double> >();
events.Add(new KeyValuePair <Date, double>(new Date(30, Month.November, 2004), 1000));
CatRisk doomCatRisk = new EventSet(events,
new Date(30, Month.November, 2004), new Date(30, Month.November, 2008));
EventPaymentOffset paymentOffset = new NoOffset();
NotionalRisk notionalRisk = new DigitalNotionalRisk(paymentOffset, 100);
FloatingCatBond catBond = new FloatingCatBond(settlementDays, vars.faceAmount, sch,
index, new ActualActual(ActualActual.Convention.ISMA),
notionalRisk,
BusinessDayConvention.ModifiedFollowing, fixingDays,
new List <double>(), new List <double>(),
new List <double?>(), new List <double?>(),
false,
100.0, new Date(30, Month.November, 2004));
IPricingEngine catBondEngine = new MonteCarloCatBondEngine(doomCatRisk, discountCurve);
catBond.setPricingEngine(catBondEngine);
Utils.setCouponPricer(catBond.cashflows(), pricer);
double price = catBond.cleanPrice();
QAssert.AreEqual(0, price);
double lossProbability = catBond.lossProbability();
double exhaustionProbability = catBond.exhaustionProbability();
double expectedLoss = catBond.expectedLoss();
QAssert.AreEqual(1.0, lossProbability, tolerance);
QAssert.AreEqual(1.0, exhaustionProbability, tolerance);
QAssert.AreEqual(1.0, expectedLoss, tolerance);
}
public void testCatBondWithDoomOnceInTenYearsProportional()
{
// Testing floating-rate cat bond in a doom once in 10 years scenario with proportional notional reduction
CommonVars vars = new CommonVars();
Date today = new Date(22, Month.November, 2004);
Settings.setEvaluationDate(today);
int settlementDays = 1;
Handle <YieldTermStructure> riskFreeRate = new Handle <YieldTermStructure>(Utilities.flatRate(today, 0.025, new Actual360()));
Handle <YieldTermStructure> discountCurve = new Handle <YieldTermStructure>(Utilities.flatRate(today, 0.03, new Actual360()));
IborIndex index = new USDLibor(new Period(6, TimeUnit.Months), riskFreeRate);
int fixingDays = 1;
double tolerance = 1.0e-6;
IborCouponPricer pricer = new BlackIborCouponPricer(new Handle <OptionletVolatilityStructure>());
Schedule sch =
new Schedule(new Date(30, Month.November, 2004),
new Date(30, Month.November, 2008),
new Period(Frequency.Semiannual),
new UnitedStates(UnitedStates.Market.GovernmentBond),
BusinessDayConvention.ModifiedFollowing, BusinessDayConvention.ModifiedFollowing,
DateGeneration.Rule.Backward, false);
List <KeyValuePair <Date, double> > events = new List <KeyValuePair <Date, double> >();
events.Add(new KeyValuePair <Date, double>(new Date(30, Month.November, 2008), 1000));
CatRisk doomCatRisk = new EventSet(events, new Date(30, Month.November, 2004), new Date(30, Month.November, 2044));
CatRisk noCatRisk = new EventSet(new List <KeyValuePair <Date, double> > (),
new Date(1, Month.Jan, 2000), new Date(31, Month.Dec, 2010));
EventPaymentOffset paymentOffset = new NoOffset();
NotionalRisk notionalRisk = new ProportionalNotionalRisk(paymentOffset, 500, 1500);
FloatingCatBond catBond =
new FloatingCatBond(settlementDays, vars.faceAmount, sch,
index, new ActualActual(ActualActual.Convention.ISMA),
notionalRisk,
BusinessDayConvention.ModifiedFollowing, fixingDays,
new List <double>(), new List <double>(),
new List <double?>(), new List <double?>(),
false,
100.0, new Date(30, Month.November, 2004));
IPricingEngine catBondEngine = new MonteCarloCatBondEngine(doomCatRisk, discountCurve);
catBond.setPricingEngine(catBondEngine);
Utils.setCouponPricer(catBond.cashflows(), pricer);
double price = catBond.cleanPrice();
double yield = catBond.yield(new ActualActual(ActualActual.Convention.ISMA), Compounding.Simple, Frequency.Annual);
double lossProbability = catBond.lossProbability();
double exhaustionProbability = catBond.exhaustionProbability();
double expectedLoss = catBond.expectedLoss();
QAssert.AreEqual(0.1, lossProbability, tolerance);
QAssert.AreEqual(0.0, exhaustionProbability, tolerance);
QAssert.AreEqual(0.05, expectedLoss, tolerance);
IPricingEngine catBondEngineRF = new MonteCarloCatBondEngine(noCatRisk, discountCurve);
catBond.setPricingEngine(catBondEngineRF);
double riskFreePrice = catBond.cleanPrice();
double riskFreeYield = catBond.yield(new ActualActual(ActualActual.Convention.ISMA), Compounding.Simple, Frequency.Annual);
double riskFreeLossProbability = catBond.lossProbability();
double riskFreeExpectedLoss = catBond.expectedLoss();
QAssert.AreEqual(0.0, riskFreeLossProbability, tolerance);
QAssert.IsTrue(Math.Abs(riskFreeExpectedLoss) < tolerance);
QAssert.AreEqual(riskFreePrice * 0.95, price, tolerance);
QAssert.IsTrue(riskFreeYield < yield);
}
public void testRiskFreeAgainstFloatingRateBond()
{
// Testing floating-rate cat bond against risk-free floating-rate bond
CommonVars vars = new CommonVars();
Date today = new Date(22, Month.November, 2004);
Settings.setEvaluationDate(today);
int settlementDays = 1;
Handle <YieldTermStructure> riskFreeRate = new Handle <YieldTermStructure>(Utilities.flatRate(today, 0.025, new Actual360()));
Handle <YieldTermStructure> discountCurve = new Handle <YieldTermStructure>(Utilities.flatRate(today, 0.03, new Actual360()));
IborIndex index = new USDLibor(new Period(6, TimeUnit.Months), riskFreeRate);
int fixingDays = 1;
double tolerance = 1.0e-6;
IborCouponPricer pricer = new BlackIborCouponPricer(new Handle <OptionletVolatilityStructure>());
// plain
Schedule sch = new Schedule(new Date(30, Month.November, 2004),
new Date(30, Month.November, 2008),
new Period(Frequency.Semiannual),
new UnitedStates(UnitedStates.Market.GovernmentBond),
BusinessDayConvention.ModifiedFollowing, BusinessDayConvention.ModifiedFollowing,
DateGeneration.Rule.Backward, false);
CatRisk noCatRisk = new EventSet(new List <KeyValuePair <Date, double> >(), new Date(1, Month.Jan, 2000), new Date(31, Month.Dec, 2010));
EventPaymentOffset paymentOffset = new NoOffset();
NotionalRisk notionalRisk = new DigitalNotionalRisk(paymentOffset, 100);
FloatingRateBond bond1 = new FloatingRateBond(settlementDays, vars.faceAmount, sch,
index, new ActualActual(ActualActual.Convention.ISMA),
BusinessDayConvention.ModifiedFollowing, fixingDays,
new List <double>(), new List <double>(),
new List <double?>(), new List <double?>(),
false,
100.0, new Date(30, Month.November, 2004));
FloatingCatBond catBond1 = new FloatingCatBond(settlementDays, vars.faceAmount, sch,
index, new ActualActual(ActualActual.Convention.ISMA),
notionalRisk,
BusinessDayConvention.ModifiedFollowing, fixingDays,
new List <double>(), new List <double>(),
new List <double?>(), new List <double?>(),
false,
100.0, new Date(30, Month.November, 2004));
IPricingEngine bondEngine = new DiscountingBondEngine(riskFreeRate);
bond1.setPricingEngine(bondEngine);
Utils.setCouponPricer(bond1.cashflows(), pricer);
IPricingEngine catBondEngine = new MonteCarloCatBondEngine(noCatRisk, riskFreeRate);
catBond1.setPricingEngine(catBondEngine);
Utils.setCouponPricer(catBond1.cashflows(), pricer);
#if QL_USE_INDEXED_COUPON
double cachedPrice1 = 99.874645;
#else
double cachedPrice1 = 99.874646;
#endif
double price = bond1.cleanPrice();
double catPrice = catBond1.cleanPrice();
if (Math.Abs(price - cachedPrice1) > tolerance || Math.Abs(catPrice - price) > tolerance)
{
QAssert.Fail("failed to reproduce floating rate bond price:\n"
+ " floating bond: " + price + "\n"
+ " catBond bond: " + catPrice + "\n"
+ " expected: " + cachedPrice1 + "\n"
+ " error: " + (catPrice - price));
}
// different risk-free and discount curve
FloatingRateBond bond2 = new FloatingRateBond(settlementDays, vars.faceAmount, sch,
index, new ActualActual(ActualActual.Convention.ISMA),
BusinessDayConvention.ModifiedFollowing, fixingDays,
new List <double>(), new List <double>(),
new List <double?>(), new List <double?>(),
false,
100.0, new Date(30, Month.November, 2004));
FloatingCatBond catBond2 = new FloatingCatBond(settlementDays, vars.faceAmount, sch,
index, new ActualActual(ActualActual.Convention.ISMA),
notionalRisk,
BusinessDayConvention.ModifiedFollowing, fixingDays,
new List <double>(), new List <double>(),
new List <double?>(), new List <double?>(),
false,
100.0, new Date(30, Month.November, 2004));
IPricingEngine bondEngine2 = new DiscountingBondEngine(discountCurve);
bond2.setPricingEngine(bondEngine2);
Utils.setCouponPricer(bond2.cashflows(), pricer);
IPricingEngine catBondEngine2 = new MonteCarloCatBondEngine(noCatRisk, discountCurve);
catBond2.setPricingEngine(catBondEngine2);
Utils.setCouponPricer(catBond2.cashflows(), pricer);
#if QL_USE_INDEXED_COUPON
double cachedPrice2 = 97.955904;
#else
double cachedPrice2 = 97.955904;
#endif
price = bond2.cleanPrice();
catPrice = catBond2.cleanPrice();
if (Math.Abs(price - cachedPrice2) > tolerance || Math.Abs(catPrice - price) > tolerance)
{
QAssert.Fail("failed to reproduce floating rate bond price:\n"
+ " floating bond: " + price + "\n"
+ " catBond bond: " + catPrice + "\n"
+ " expected: " + cachedPrice2 + "\n"
+ " error: " + (catPrice - price));
}
// varying spread
List <double> spreads = new InitializedList <double>(4);
spreads[0] = 0.001;
spreads[1] = 0.0012;
spreads[2] = 0.0014;
spreads[3] = 0.0016;
FloatingRateBond bond3 = new FloatingRateBond(settlementDays, vars.faceAmount, sch,
index, new ActualActual(ActualActual.Convention.ISMA),
BusinessDayConvention.ModifiedFollowing, fixingDays,
new List <double>(), spreads,
new List <double?>(), new List <double?>(),
false,
100.0, new Date(30, Month.November, 2004));
FloatingCatBond catBond3 = new FloatingCatBond(settlementDays, vars.faceAmount, sch,
index, new ActualActual(ActualActual.Convention.ISMA),
notionalRisk,
BusinessDayConvention.ModifiedFollowing, fixingDays,
new List <double>(), spreads,
new List <double?>(), new List <double?>(),
false,
100.0, new Date(30, Month.November, 2004));
bond3.setPricingEngine(bondEngine2);
Utils.setCouponPricer(bond3.cashflows(), pricer);
catBond3.setPricingEngine(catBondEngine2);
Utils.setCouponPricer(catBond3.cashflows(), pricer);
#if QL_USE_INDEXED_COUPON
double cachedPrice3 = 98.495458;
#else
double cachedPrice3 = 98.495459;
#endif
price = bond3.cleanPrice();
catPrice = catBond3.cleanPrice();
if (Math.Abs(price - cachedPrice3) > tolerance || Math.Abs(catPrice - price) > tolerance)
{
QAssert.Fail("failed to reproduce floating rate bond price:\n"
+ " floating bond: " + price + "\n"
+ " catBond bond: " + catPrice + "\n"
+ " expected: " + cachedPrice2 + "\n"
+ " error: " + (catPrice - price));
}
}
