com.opengamma.analytics.financial.interestrate.payments.method.CapFloorIborLMMDDMethod.java Source code

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Here is the source code for com.opengamma.analytics.financial.interestrate.payments.method.CapFloorIborLMMDDMethod.java

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/**
 * Copyright (C) 2011 - present by OpenGamma Inc. and the OpenGamma group of companies
 *
 * Please see distribution for license.
 */
package com.opengamma.analytics.financial.interestrate.payments.method;

import org.apache.commons.lang.Validate;

import com.opengamma.analytics.financial.interestrate.InstrumentDerivative;
import com.opengamma.analytics.financial.interestrate.YieldCurveBundle;
import com.opengamma.analytics.financial.interestrate.method.PricingMethod;
import com.opengamma.analytics.financial.interestrate.payments.derivative.CapFloorIbor;
import com.opengamma.analytics.financial.model.interestrate.definition.LiborMarketModelDisplacedDiffusionDataBundle;
import com.opengamma.analytics.financial.model.option.pricing.analytic.formula.BlackFunctionData;
import com.opengamma.analytics.financial.model.option.pricing.analytic.formula.BlackPriceFunction;
import com.opengamma.analytics.financial.model.option.pricing.analytic.formula.EuropeanVanillaOption;
import com.opengamma.analytics.math.function.Function1D;
import com.opengamma.util.money.CurrencyAmount;

/**
 *  Class used to compute the price a Ibor cap/floor with LMM.
 *  No convexity adjustment is done for payment at non-standard dates.
 *  @deprecated Use {@link com.opengamma.analytics.financial.interestrate.payments.provider.CapFloorIborLMMDDMethod}
 */
@Deprecated
public class CapFloorIborLMMDDMethod implements PricingMethod {

    /**
     * The Black function used in the pricing.
     */
    private static final BlackPriceFunction BLACK_FUNCTION = new BlackPriceFunction();

    /**
     * Computes the present value of the cap/floor in the LMM. It is computed using a Black formula (on the shifted rate). The volatility is the LMM volatilities for the
     * relevant period multiplied by the time dependent factor square mean.
     * The method is used mainly for calibration purposes.
     * @param cap The cap. Should have the same underlying index as the model (same payment frequency).
     * @param lmmData The Model parameters.
     * @return The present value.
     */
    public CurrencyAmount presentValue(final CapFloorIbor cap,
            final LiborMarketModelDisplacedDiffusionDataBundle lmmData) {
        final int index = lmmData.getLmmParameter().getTimeIndex(cap.getFixingPeriodStartTime());
        double volatility = 0;
        for (int loopfact = 0; loopfact < lmmData.getLmmParameter().getNbFactor(); loopfact++) {
            volatility += lmmData.getLmmParameter().getVolatility()[index][loopfact]
                    * lmmData.getLmmParameter().getVolatility()[index][loopfact];
        }
        volatility = Math.sqrt(volatility);
        final double timeDependentFactor = Math
                .sqrt((Math.exp(2 * lmmData.getLmmParameter().getMeanReversion() * cap.getFixingTime()) - 1.0)
                        / (2.0 * lmmData.getLmmParameter().getMeanReversion()));
        volatility *= timeDependentFactor;
        final double displacement = lmmData.getLmmParameter().getDisplacement()[index];
        final double beta = lmmData.getCurve(cap.getForwardCurveName())
                .getDiscountFactor(cap.getFixingPeriodStartTime())
                / lmmData.getCurve(cap.getForwardCurveName()).getDiscountFactor(cap.getFixingPeriodEndTime())
                * lmmData.getCurve(cap.getFundingCurveName()).getDiscountFactor(cap.getFixingPeriodEndTime())
                / lmmData.getCurve(cap.getFundingCurveName()).getDiscountFactor(cap.getFixingPeriodStartTime());
        final double strikeAdjusted = (cap.getStrike() - (beta - 1) / cap.getFixingAccrualFactor()) / beta;
        final EuropeanVanillaOption option = new EuropeanVanillaOption(strikeAdjusted + displacement, 1.0,
                cap.isCap()); // Time is in timeDependentFactor
        final double forwardDsc = (lmmData.getCurve(cap.getFundingCurveName())
                .getDiscountFactor(cap.getFixingPeriodStartTime())
                / lmmData.getCurve(cap.getFundingCurveName()).getDiscountFactor(cap.getFixingPeriodEndTime()) - 1.0)
                / cap.getFixingAccrualFactor();
        final double df = lmmData.getCurve(cap.getFundingCurveName()).getDiscountFactor(cap.getPaymentTime());
        final BlackFunctionData dataBlack = new BlackFunctionData(forwardDsc + displacement, df, volatility);
        final Function1D<BlackFunctionData, Double> func = BLACK_FUNCTION.getPriceFunction(option);
        final double price = beta * func.evaluate(dataBlack) * cap.getNotional() * cap.getPaymentYearFraction();
        return CurrencyAmount.of(cap.getCurrency(), price);
    }

    @Override
    public CurrencyAmount presentValue(final InstrumentDerivative instrument, final YieldCurveBundle curves) {
        Validate.isTrue(instrument instanceof CapFloorIbor, "Ibor Cap/floor");
        Validate.isTrue(curves instanceof LiborMarketModelDisplacedDiffusionDataBundle,
                "Bundle should contain LMM data");
        return presentValue((CapFloorIbor) instrument, (LiborMarketModelDisplacedDiffusionDataBundle) curves);
    }

}