public VolStruct BuildVolTree(float kappa, float theta, float sigma, float V0, float dt, int NT, float threshold)
{
// Creates the Beliaeva-Nawalkha tree for the variance process
// INPUTS
// kappa = Heston parameter for mean reversion speed
// theta = Heston parameter for mean reversion level
// sigma = Heston parameter for vol of vol
// V0 = Heston parameter for initial variance
// rf = Risk free rate
// dt = time increment
// NT = Number of time steps
// threshold = threshold for which V can be zero
// OUTPUTS
// X = the tree for transformed variance
// V = the tree for the original variance
// RBound = the row where the V(n,t) variances are zero
// M = row where volatility starts at time 1
// Initial quantities
float X0 = Convert.ToSingle(2.0 * Math.Sqrt(V0) / sigma);
float be = Convert.ToSingle(X0 / Math.Sqrt(dt) / Math.Floor(X0 / Math.Sqrt(1.5 * dt)));
float bc = Convert.ToSingle(X0 / Math.Sqrt(dt) / Math.Floor(X0 / Math.Sqrt(1.5 * dt) + 1.0));
float b;
if (Math.Abs(bc - Math.Sqrt(1.5)) < Math.Abs(be - Math.Sqrt(1.5)))
{
b = bc;
}
else
{
b = be;
}
if ((b < 1.0) || (b > Math.Sqrt(2.0)))
{
Console.WriteLine("Warning b = {0:F5} but should be 1 < b < 1.4142\n", b);
}
// Initialize the X-matrix and V-matrix
int NR = 2 * NT - 1;
float[,] X = new float[NR, NT];
float[,] V = new float[NR, NT];
int M = (NR + 1) / 2 - 1;
X[M, 0] = X0;
// Time 1 node for X
float muX = Convert.ToSingle(1.0 / X0 * (0.5 * kappa * (4.0 * theta / sigma / sigma - X0 * X0) - 0.5));
float J = Convert.ToSingle(Math.Floor(muX * Math.Sqrt(dt) / b + 1.0 / b / b));
X[M - 1, 1] = Convert.ToSingle(X[M, 0] + b * (J + 1.0) * Math.Sqrt(dt));
X[M + 0, 1] = Convert.ToSingle(X[M, 0] + b * (J + 0.0) * Math.Sqrt(dt));
X[M + 1, 1] = Convert.ToSingle(X[M, 0] + b * (J - 1.0) * Math.Sqrt(dt));
// Remaining nodes for X
for (int t = 1; t <= NT - 2; t++)
{
for (int n = M - t; n <= M + t; n++)
{
muX = Convert.ToSingle(1.0 / X[n, t] * (0.5 * kappa * (4.0 * theta / sigma / sigma - X[n, t] * X[n, t]) - 0.5));
J = Convert.ToSingle(Math.Floor(muX * Math.Sqrt(dt) / b + 1 / b / b));
// Nodes where X > 0
if (X[n, t] > threshold & X[n, t] * X[n, t] * sigma * sigma / 4.0 > threshold)
{
X[n - 1, t + 1] = Convert.ToSingle(X[n, t] + b * (J + 1.0) * Math.Sqrt(dt));
X[n + 0, t + 1] = Convert.ToSingle(X[n, t] + b * (J + 0.0) * Math.Sqrt(dt));
X[n + 1, t + 1] = Convert.ToSingle(X[n, t] + b * (J - 1.0) * Math.Sqrt(dt));
}
// Nodes where X = 0
else
{
X[n - 1, t + 1] = X[n - 1, t];
X[n + 0, t + 1] = X[n + 0, t];
X[n + 1, t + 1] = X[n + 1, t];
}
}
}
// Identify row of the tree where X = 0
int RBound = 0;
while (X[RBound, M] >= threshold && RBound < NR - 1)
{
RBound += 1;
}
//// Build the volatility tree V(n,t)
for (int t = 0; t <= NT - 1; t++)
{
for (int n = 0; n <= NR - 1; n++)
{
V[n, t] = Convert.ToSingle(X[n, t] * X[n, t] * sigma * sigma / 4.0);
if (V[n, t] < threshold)
{
V[n, t] = 0.0f;
}
if (X[n, t] < threshold)
{
X[n, t] = 0.0f;
}
}
}
// Output the results
VolStruct output = new VolStruct();
output.X = X;
output.V = V;
output.M = M;
output.RBound = RBound;
return(output);
}
public BivariateStruct BuildBivariateTree(float S0, string PutCall, float Strike, float T, float rf, int NT, float kappa, float theta, float sigma, float V0, float rho, float threshold)
{
float sigmay0 = Convert.ToSingle(Math.Sqrt(1 - rho * rho) * Math.Sqrt(V0));
float dt = T / NT;
// Generate the volatility trees
VolTree VT = new VolTree();
VolStruct VolTree = VT.BuildVolTree(kappa, theta, sigma, V0, dt, NT, threshold);
X = VolTree.X;
V = VolTree.V;
// Erase the VolTree structured object since it's no longer needed
VolTree.Dispose();
int RBound = VolTree.RBound;
int M = VolTree.M;
// if(RBound != 2*NT-1)
// Console.WriteLine("Vt matrix not triangular");
// Find the column where the tree changes from triangular to rectangular
int ColChange = RBound - M + 1;
// The values of k(t) from Equation (11) and I(t) from (14)
int[,] k = new int[2 * NT - 1, NT];
for (int t = 0; t <= NT - 1; t++)
{
for (int n = M - t; n <= M + t; n++)
{
if (V[n, t] > 0)
{
k[n, t] = Convert.ToInt16(Math.Ceiling(Math.Sqrt(V[n, t] / V0)));
}
else
{
k[n, t] = 1;
}
}
}
// Break up k[n,t] into columns and store the maximum of each column
int[] maxK = new int[NT];
int[] kcol = new int[2 * NT - 1];
for (int t = 0; t <= NT - 1; t++)
{
for (int n = 0; n <= 2 * NT - 2; n++)
{
kcol[n] = k[n, t];
}
maxK[t] = kcol.Max();
}
int[] numY = new int[NT];
int[] numV = new int[NT];
int[] numRows = new int[NT];
numY[0] = 1;
numY[1] = 3;
numV[0] = 1;
numV[1] = 3;
numRows[0] = 1;
numRows[1] = 9;
for (int t = 2; t <= NT - 1; t++)
{
numY[t] = numY[t - 1] + 2 * maxK[t];
numV[t] = 2 * (t + 1) - 1;
numRows[t] = numV[t] * numY[t];
}
// Number of rows required for the main Yt(n,t) matrix
int NR = numRows.Max();
Console.WriteLine("Yt matrix for log stock price has {0:0,0} rows and {1:0,0} columns = {2:0,0} elements", NR, NT, NR * NT);
// Find the branch indices
int[,] Branch = new int[numRows[NT - 2], 9 * (NT - 1)];
for (int j = 0; j <= 8; j++)
{
Branch[0, j] = j;
}
for (int t = 1; t <= NT - 2; t++)
{
int nY = numY[t];
int First = maxK[t];
int nK = 2 * t + 1;
int[] K = new int[nK];
for (int j = 0; j <= nK - 1; j++)
{
K[j] = k[M - t + j, t];
}
for (int n = 0; n <= numRows[t] - 1; n++)
{
int a = Convert.ToInt32(Math.Ceiling(Convert.ToDouble(n / nY)));
int b = n % nY;
// Find the middle-to-middle branches
Branch[n, 9 * t + 1] = First + a * numY[t + 1] + b;
Branch[n, 9 * t + 4] = Branch[n, 9 * t + 1] + numY[t + 1];
Branch[n, 9 * t + 7] = Branch[n, 9 * t + 1] + 2 * numY[t + 1];
// Find the rest of the branches
Branch[n, 9 * t + 0] = Branch[n, 9 * t + 1] - K[a];
Branch[n, 9 * t + 2] = Branch[n, 9 * t + 1] + K[a];
Branch[n, 9 * t + 3] = Branch[n, 9 * t + 4] - K[a];
Branch[n, 9 * t + 5] = Branch[n, 9 * t + 4] + K[a];
Branch[n, 9 * t + 6] = Branch[n, 9 * t + 7] - K[a];
Branch[n, 9 * t + 8] = Branch[n, 9 * t + 7] + K[a];
}
}
// Adjust the last branch upward
for (int t = ColChange; t <= NT - 2; t++)
{
for (int j = 6; j <= 8; j++)
{
Branch[numRows[t] - 1, 9 * t + j] = Branch[numRows[t] - 2, 9 * t + j];
}
}
// Find the values for the indices and for the probabilities
float Vt = new float();
float Xt = new float();
int Kt = new int();
// Log stock tree (Yt), stock price tree (St), and probabilities (Prob)
float[,] Yt = new float[NR, NT];
float Y0 = Convert.ToSingle(Math.Log(S0) - rho * V0 / sigma);
Yt[0, 0] = Y0;
float[,] Prob = new float[numRows[NT - 2], 9 * (NT - 1)];
float X0 = X[M, 0];
Probabilities PR = new Probabilities();
float ht, muy;
int I;
int[] NewBranch = new int[9];
for (int t = 0; t <= NT - 2; t++)
{
int n = -1;
int[] J = new int[2 * t + 1];
for (int j = 0; j <= 2 * t; j++)
{
J[j] = -t + j;
}
for (int j = 0; j <= numV[t] - 1; j++)
{
for (int r = 0; r <= numY[t] - 1; r++)
{
n += 1;
Vt = V[M + J[j], t]; // Volatility
Xt = X[M + J[j], t]; // Transformed volatility
Kt = k[M + J[j], t]; // Node jump k(t)
for (int s = 0; s <= 8; s++)
{
NewBranch[s] = Branch[n, 9 * t + s];
}
muy = Convert.ToSingle((rho * kappa / sigma - 0.5) * Vt);
I = Convert.ToInt32(Math.Round(muy / Kt / sigmay0 * Math.Sqrt(dt)));
if (Yt[n, t] > 0)
{
for (int s = 0; s <= 8; s++)
{
if (s == 1 || s == 4 || s == 7)
{
// Middle node
Yt[NewBranch[s], t + 1] = Yt[n, t] + (I + 0) * Kt * sigmay0 * Convert.ToSingle(Math.Sqrt(dt));
}
else if (s == 0 || s == 3 || s == 6)
{
// Up node
Yt[NewBranch[s], t + 1] = Yt[n, t] + (I + 1) * Kt * sigmay0 * Convert.ToSingle(Math.Sqrt(dt));
}
else if (s == 2 || s == 5 || s == 8)
{
// Down node
Yt[NewBranch[s], t + 1] = Yt[n, t] + (I - 1) * Kt * sigmay0 * Convert.ToSingle(Math.Sqrt(dt));
}
}
}
if (Yt[n, t] > 0.0f) // Construct the joint probabilities
{
float[] pv = PR.probV(Xt, X0, dt, kappa, theta, sigma);
float pvu = pv[0];
float pvm = pv[1];
float pvd = pv[2];
float[] py = PR.probY(Vt, V0, Yt[n, t], dt, rho, sigma, kappa);
float pyu = py[0];
float pym = py[1];
float pyd = py[2];
float[] prob = new float[9];
prob[0] = pvu * pyu;
prob[1] = pvu * pym;
prob[2] = pvu * pyd;
prob[3] = pvm * pyu;
prob[4] = pvm * pym;
prob[5] = pvm * pyd;
prob[6] = pvd * pyu;
prob[7] = pvd * pym;
prob[8] = pvd * pyd;
for (int s = 0; s <= 8; s++)
{
Prob[n, 9 * t + s] = prob[s];
}
}
}
}
}
// Find the American and European option prices
float[,] Euro = new float[NR, NT];
float[,] Amer = new float[NR, NT];
// Stock price at maturity
float[] ST = new float[numRows[NT - 1]];
ht = Convert.ToSingle((rf - rho * kappa * theta / sigma) * Convert.ToDouble(NT - 1) * dt);
int[] JJ = new int[2 * (NT - 1) + 1];
for (int j = 0; j <= 2 * (NT - 1); j++)
{
JJ[j] = -(NT - 1) + j;
}
int m = -1;
for (int j = 0; j <= numV[NT - 1] - 1; j++)
{
for (int r = 0; r <= numY[NT - 1] - 1; r++)
{
m += 1;
Vt = V[M + JJ[j], NT - 1];
if (Yt[m, NT - 1] > 0)
{
ST[m] = Convert.ToSingle(Math.Exp(Yt[m, NT - 1] + rho / sigma * Vt + ht));
}
}
}
// Payoff at maturity
for (int n = 0; n <= NR - 1; n++)
{
if (PutCall == "C")
{
Euro[n, NT - 1] = Convert.ToSingle(Math.Max(ST[n] - Strike, 0.0));
Amer[n, NT - 1] = Convert.ToSingle(Math.Max(ST[n] - Strike, 0.0));
}
else if (PutCall == "P")
{
Euro[n, NT - 1] = Convert.ToSingle(Math.Max(Strike - ST[n], 0.0));
Amer[n, NT - 1] = Convert.ToSingle(Math.Max(Strike - ST[n], 0.0));
}
}
float[] P = new float[9];
int[] B = new int[9];
float St = new float();
for (int t = NT - 2; t >= 0; t--)
{
int n = -1;
ht = Convert.ToSingle((rf - rho * kappa * theta / sigma) * Convert.ToDouble(t) * dt);
int[] J = new int[2 * t + 1];
for (int j = 0; j <= 2 * t; j++)
{
J[j] = -t + j;
}
for (int j = 0; j <= numV[t] - 1; j++)
{
for (int r = 0; r <= numY[t] - 1; r++)
{
n += 1;
Vt = V[M + J[j], t];
if (Yt[n, t] > 0)
{
St = Convert.ToSingle(Math.Exp(Yt[n, t] + rho / sigma * Vt + ht)); // Stock price
for (int s = 0; s <= 8; s++)
{
P[s] = Prob[n, 9 * t + s];
B[s] = Branch[n, 9 * t + s];
}
Euro[n, t] = P[0] * Euro[B[0], t + 1] + P[1] * Euro[B[1], t + 1] + P[2] * Euro[B[2], t + 1]
+ P[3] * Euro[B[3], t + 1] + P[4] * Euro[B[4], t + 1] + P[5] * Euro[B[5], t + 1]
+ P[6] * Euro[B[6], t + 1] + P[7] * Euro[B[7], t + 1] + P[8] * Euro[B[8], t + 1];
Euro[n, t] = Convert.ToSingle(Math.Exp(-rf * dt) * Euro[n, t]);
Amer[n, t] = P[0] * Amer[B[0], t + 1] + P[1] * Amer[B[1], t + 1] + P[2] * Amer[B[2], t + 1]
+ P[3] * Amer[B[3], t + 1] + P[4] * Amer[B[4], t + 1] + P[5] * Amer[B[5], t + 1]
+ P[6] * Amer[B[6], t + 1] + P[7] * Amer[B[7], t + 1] + P[8] * Amer[B[8], t + 1];
Amer[n, t] = Convert.ToSingle(Math.Exp(-rf * dt) * Amer[n, t]);
if (PutCall == "C")
{
Amer[n, t] = Math.Max(St - Strike, Amer[n, t]);
}
else if (PutCall == "P")
{
Amer[n, t] = Math.Max(Strike - St, Amer[n, t]);
}
}
}
}
}
float EuroPrice = Euro[0, 0]; // European option
float AmerPrice = Amer[0, 0]; // American option
// Output the results
BivariateStruct output = new BivariateStruct();
output.Euro = Euro;
output.Amer = Amer;
output.Yt = Yt;
output.V = V;
output.X = X;
// output.St = St;
output.Prob = Prob;
output.EuroPrice = EuroPrice;
output.AmerPrice = AmerPrice;
return(output);
}