com.opengamma.analytics.financial.model.option.pricing.analytic.EuropeanOptionOnEuropeanVanillaOptionModel.java Source code

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Here is the source code for com.opengamma.analytics.financial.model.option.pricing.analytic.EuropeanOptionOnEuropeanVanillaOptionModel.java

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/**
 * Copyright (C) 2009 - present by OpenGamma Inc. and the OpenGamma group of companies
 *
 * Please see distribution for license.
 */
package com.opengamma.analytics.financial.model.option.pricing.analytic;

import org.apache.commons.lang.Validate;
import org.threeten.bp.ZonedDateTime;

import com.opengamma.analytics.financial.model.option.definition.EuropeanOptionOnEuropeanVanillaOptionDefinition;
import com.opengamma.analytics.financial.model.option.definition.EuropeanVanillaOptionDefinition;
import com.opengamma.analytics.financial.model.option.definition.OptionDefinition;
import com.opengamma.analytics.financial.model.option.definition.StandardOptionDataBundle;
import com.opengamma.analytics.math.function.Function1D;
import com.opengamma.analytics.math.rootfinding.BisectionSingleRootFinder;
import com.opengamma.analytics.math.rootfinding.RealSingleRootFinder;
import com.opengamma.analytics.math.statistics.distribution.BivariateNormalDistribution;
import com.opengamma.analytics.math.statistics.distribution.NormalDistribution;
import com.opengamma.analytics.math.statistics.distribution.ProbabilityDistribution;
import com.opengamma.util.time.DateUtils;
import com.opengamma.util.time.Expiry;

/**
 * 
 */
public class EuropeanOptionOnEuropeanVanillaOptionModel
        extends AnalyticOptionModel<EuropeanOptionOnEuropeanVanillaOptionDefinition, StandardOptionDataBundle> {
    private static final BlackScholesMertonModel BSM = new BlackScholesMertonModel();
    private static final ProbabilityDistribution<Double> NORMAL = new NormalDistribution(0, 1);
    private static final ProbabilityDistribution<double[]> BIVARIATE = new BivariateNormalDistribution();
    private static final RealSingleRootFinder ROOT_FINDER = new BisectionSingleRootFinder();

    @Override
    public Function1D<StandardOptionDataBundle, Double> getPricingFunction(
            final EuropeanOptionOnEuropeanVanillaOptionDefinition definition) {
        Validate.notNull(definition, "definition");
        return new Function1D<StandardOptionDataBundle, Double>() {

            @SuppressWarnings("synthetic-access")
            @Override
            public Double evaluate(final StandardOptionDataBundle data) {
                Validate.notNull(data, "data");
                final double s = data.getSpot();
                final OptionDefinition underlying = definition.getUnderlyingOption();
                final double k1 = definition.getStrike();
                final double k2 = underlying.getStrike();
                final ZonedDateTime date = data.getDate();
                final double t1 = definition.getTimeToExpiry(date);
                final double t2 = definition.getUnderlyingOption().getTimeToExpiry(date);
                final double deltaT = t2 - t1;
                final double sigma = data.getVolatility(t1, k1); //REVIEW emcleod 20-7-10 This will work with a flat volatility surface but otherwise will give odd results
                final double r = data.getInterestRate(t1);
                final double b = data.getCostOfCarry();
                final double criticalValue = getCriticalValue(new EuropeanVanillaOptionDefinition(k2,
                        new Expiry(DateUtils.getDateOffsetWithYearFraction(date, deltaT)), underlying.isCall()),
                        data, k1);
                final double d1 = getD1(s, criticalValue, t1, sigma, b);
                final double d2 = getD2(d1, sigma, t1);
                final double d3 = getD1(s, k2, t2, sigma, b);
                final double d4 = getD2(d3, sigma, t2);
                if (definition.isCall()) {
                    final double rho = Math.sqrt(t1 / t2);
                    if (underlying.isCall()) {
                        return s * Math.exp(t2 * (b - r)) * BIVARIATE.getCDF(new double[] { d3, d1, rho })
                                - k2 * Math.exp(-r * t2) * BIVARIATE.getCDF(new double[] { d4, d2, rho })
                                - k1 * Math.exp(-r * t1) * NORMAL.getCDF(d2);
                    }
                    return k2 * Math.exp(-r * t2) * BIVARIATE.getCDF(new double[] { -d4, -d2, rho })
                            - s * Math.exp(t2 * (b - r)) * BIVARIATE.getCDF(new double[] { -d3, -d1, rho })
                            - k1 * Math.exp(-r * t1) * NORMAL.getCDF(-d2);
                }
                final double rho = -Math.sqrt(t1 / t2);
                if (underlying.isCall()) {
                    return k2 * Math.exp(-r * t2) * BIVARIATE.getCDF(new double[] { d4, -d2, rho })
                            - s * Math.exp(t2 * (b - r)) * BIVARIATE.getCDF(new double[] { d3, -d1, rho })
                            + k1 * Math.exp(-r * t1) * NORMAL.getCDF(-d2);
                }
                return s * Math.exp(t2 * (b - r)) * BIVARIATE.getCDF(new double[] { -d3, d1, rho })
                        - k2 * Math.exp(-r * t2) * BIVARIATE.getCDF(new double[] { -d4, d2, rho })
                        + k1 * Math.exp(-r * t1) * NORMAL.getCDF(d2);
            }

        };
    }

    private double getCriticalValue(final OptionDefinition definition, final StandardOptionDataBundle data,
            final double k) {
        final Function1D<Double, Double> f = new Function1D<Double, Double>() {

            @SuppressWarnings("synthetic-access")
            @Override
            public Double evaluate(final Double x) {
                return k - BSM.getPricingFunction(definition).evaluate(data.withSpot(x));
            }

        };
        return ROOT_FINDER.getRoot(f, 0., 10000.);
    }
}