//-------------------------------------------------------------------------
private void validateData(ResolvedFxSingleBarrierOption option, RatesProvider ratesProvider, BlackFxOptionVolatilities volatilities, RecombiningTrinomialTreeData data)
{
ResolvedFxVanillaOption underlyingOption = option.UnderlyingOption;
ArgChecker.isTrue(DoubleMath.fuzzyEquals(data.getTime(data.NumberOfSteps), volatilities.relativeTime(underlyingOption.Expiry), SMALL), "time to expiry mismatch between pricing option and trinomial tree data");
ArgChecker.isTrue(DoubleMath.fuzzyEquals(data.Spot, ratesProvider.fxRate(underlyingOption.Underlying.CurrencyPair), SMALL), "today's FX rate mismatch between rates provider and trinomial tree data");
}
//-------------------------------------------------------------------------
private ValueDerivatives priceDerivatives(ResolvedFxSingleBarrierOption option, RatesProvider ratesProvider, BlackFxOptionVolatilities volatilities, RecombiningTrinomialTreeData data)
{
validate(option, ratesProvider, volatilities);
validateData(option, ratesProvider, volatilities, data);
int nSteps = data.NumberOfSteps;
ResolvedFxVanillaOption underlyingOption = option.UnderlyingOption;
double timeToExpiry = data.getTime(nSteps);
ResolvedFxSingle underlyingFx = underlyingOption.Underlying;
Currency ccyBase = underlyingFx.CounterCurrencyPayment.Currency;
Currency ccyCounter = underlyingFx.CounterCurrencyPayment.Currency;
DiscountFactors baseDiscountFactors = ratesProvider.discountFactors(ccyBase);
DiscountFactors counterDiscountFactors = ratesProvider.discountFactors(ccyCounter);
double rebateAtExpiry = 0d; // used to price knock-in option
double rebateAtExpiryDerivative = 0d; // used to price knock-in option
double notional = Math.Abs(underlyingFx.BaseCurrencyPayment.Amount);
double[] rebateArray = new double[nSteps + 1];
SimpleConstantContinuousBarrier barrier = (SimpleConstantContinuousBarrier)option.Barrier;
if (option.Rebate.Present)
{
CurrencyAmount rebateCurrencyAmount = option.Rebate.get();
double rebatePerUnit = rebateCurrencyAmount.Amount / notional;
bool isCounter = rebateCurrencyAmount.Currency.Equals(ccyCounter);
double rebate = isCounter ? rebatePerUnit : rebatePerUnit * barrier.BarrierLevel;
if (barrier.KnockType.KnockIn)
{ // use in-out parity
double dfCounterAtExpiry = counterDiscountFactors.discountFactor(timeToExpiry);
double dfBaseAtExpiry = baseDiscountFactors.discountFactor(timeToExpiry);
for (int i = 0; i < nSteps + 1; ++i)
{
rebateArray[i] = isCounter ? rebate * dfCounterAtExpiry / counterDiscountFactors.discountFactor(data.getTime(i)) : rebate * dfBaseAtExpiry / baseDiscountFactors.discountFactor(data.getTime(i));
}
if (isCounter)
{
rebateAtExpiry = rebatePerUnit * dfCounterAtExpiry;
}
else
{
rebateAtExpiry = rebatePerUnit * data.Spot * dfBaseAtExpiry;
rebateAtExpiryDerivative = rebatePerUnit * dfBaseAtExpiry;
}
}
else
{
Arrays.fill(rebateArray, rebate);
}
}
ConstantContinuousSingleBarrierKnockoutFunction barrierFunction = ConstantContinuousSingleBarrierKnockoutFunction.of(underlyingOption.Strike, timeToExpiry, underlyingOption.PutCall, nSteps, barrier.BarrierType, barrier.BarrierLevel, DoubleArray.ofUnsafe(rebateArray));
ValueDerivatives barrierPrice = TREE.optionPriceAdjoint(barrierFunction, data);
if (barrier.KnockType.KnockIn)
{ // use in-out parity
EuropeanVanillaOptionFunction vanillaFunction = EuropeanVanillaOptionFunction.of(underlyingOption.Strike, timeToExpiry, underlyingOption.PutCall, nSteps);
ValueDerivatives vanillaPrice = TREE.optionPriceAdjoint(vanillaFunction, data);
return(ValueDerivatives.of(vanillaPrice.Value + rebateAtExpiry - barrierPrice.Value, DoubleArray.of(vanillaPrice.getDerivative(0) + rebateAtExpiryDerivative - barrierPrice.getDerivative(0))));
}
return(barrierPrice);
}
public virtual void test_recoverVolatility()
{
int nSteps = TREE_DATA.NumberOfSteps;
double spot = TREE_DATA.Spot;
double timeToExpiry = TREE_DATA.getTime(nSteps);
double dfDom = RATE_PROVIDER.discountFactors(USD).discountFactor(timeToExpiry);
double dfFor = RATE_PROVIDER.discountFactors(EUR).discountFactor(timeToExpiry);
double forward = spot * dfFor / dfDom;
for (int i = 0; i < 100; ++i)
{
double strike = spot * (0.8 + 0.004 * i);
OptionFunction func = EuropeanVanillaOptionFunction.of(strike, timeToExpiry, PutCall.CALL, nSteps);
double price = TREE.optionPrice(func, TREE_DATA);
double impliedVol = BlackFormulaRepository.impliedVolatility(price / dfDom, forward, strike, timeToExpiry, true);
double orgVol = VOLS.volatility(FX_PRODUCT.CurrencyPair, timeToExpiry, strike, forward);
assertEquals(impliedVol, orgVol, orgVol * 0.1); // large tol
double priceMrkt = TREE.optionPrice(func, TREE_DATA_MRKT);
double impliedVolMrkt = BlackFormulaRepository.impliedVolatility(priceMrkt / dfDom, forward, strike, timeToExpiry, true);
double orgVolMrkt = VOLS_MRKT.volatility(FX_PRODUCT.CurrencyPair, timeToExpiry, strike, forward);
assertEquals(impliedVolMrkt, orgVolMrkt, orgVolMrkt * 0.1); // large tol
}
}