//! Conventional/standard upfront-to-spread conversion
/*! Under a standard ISDA model and a set of standardised
* instrument characteristics, it is the running only quoted
* spread that will make a CDS contract have an NPV of 0 when
* quoted for that running only spread. Refer to: "ISDA
* Standard CDS converter specification." May 2009.
*
* The conventional recovery rate to apply in the calculation
* is as specified by ISDA, not necessarily equal to the
* market-quoted one. It is typically 0.4 for SeniorSec and
* 0.2 for subordinate.
*
* \note The conversion employs a flat hazard rate. As a result,
* you will not recover the market quotes.
*
* \note This method performs the calculation with the
* instrument characteristics. It will coincide with
* the ISDA calculation if your object has the standard
* characteristics. Notably:
* - The calendar should have no bank holidays, just
* weekends.
* - The yield curve should be LIBOR piecewise ant
* in fwd rates, with a discount factor of 1 on the
* calculation date, which coincides with the trade
* date.
* - Convention should be Following for yield curve and
* contract cashflows.
* - The CDS should pay accrued and mature on standard
* IMM dates, settle on trade date +1 and upfront
* settle on trade date +3.
*/
public double?conventionalSpread(double conventionalRecovery,
Handle <YieldTermStructure> discountCurve,
DayCounter dayCounter)
{
double flatHazardRate = impliedHazardRate(0.0,
discountCurve,
dayCounter,
conventionalRecovery);
Handle <DefaultProbabilityTermStructure> probability = new Handle <DefaultProbabilityTermStructure>(
new FlatHazardRate(0, new WeekendsOnly(), flatHazardRate, dayCounter));
MidPointCdsEngine engine = new MidPointCdsEngine(probability, conventionalRecovery, discountCurve, true);
setupArguments(engine.getArguments());
engine.calculate();
CreditDefaultSwap.Results results = engine.getResults() as CreditDefaultSwap.Results;
return(results.fairSpread);
}
public double impliedHazardRate(double targetNPV,
Handle <YieldTermStructure> discountCurve,
DayCounter dayCounter,
double recoveryRate = 0.4,
double accuracy = 1.0e-6)
{
SimpleQuote flatRate = new SimpleQuote(0.0);
Handle <DefaultProbabilityTermStructure> probability = new Handle <DefaultProbabilityTermStructure>(
new FlatHazardRate(0, new WeekendsOnly(), new Handle <Quote>(flatRate), dayCounter));
MidPointCdsEngine engine = new MidPointCdsEngine(probability, recoveryRate, discountCurve);
setupArguments(engine.getArguments());
CreditDefaultSwap.Results results = engine.getResults() as CreditDefaultSwap.Results;
ObjectiveFunction f = new ObjectiveFunction(targetNPV, flatRate, engine, results);
double guess = 0.001;
double step = guess * 0.1;
return(new Brent().solve(f, accuracy, guess, step));
}
