finMath lib documentation
net.finmath.montecarlo.interestrate.products

## Class SwaptionAnalyticApproximation

• All Implemented Interfaces:
Product

public class SwaptionAnalyticApproximation
extends AbstractLIBORMonteCarloProduct
This class implements an analytic swaption valuation formula under a LIBOR market model. The algorithm implemented here is the OIS discounting version of the algorithm described in ISBN 0470047224 (see SwaptionSingleCurveAnalyticApproximation). The approximation assumes that the forward rates (LIBOR) follow a log normal model and that the model provides the integrated instantaneous covariance of the log-forward rates. The getValue method calculates the approximated integrated instantaneous variance of the swap rate, using the approximation $\frac{d log(S(t))}{d log(L(t))} \approx \frac{d log(S(0))}{d log(L(0))} = : w.$ Since $$L$$ is a vector, $$w$$ is a gradient (vector). The class then approximates the Black volatility of a swaption via $\sigma_S^{2} T := \sum_{i,j} w_{i} \gamma_{i,j} w_{j}$ where $$(\gamma_{i,j})_{i,j = 1,...,m}$$ is the covariance matrix of the forward rates. The valuation can be performed in terms of value or implied Black volatility.
Author:
Christian Fries
Date:
17.05.2007.
• ### Nested Class Summary

Nested Classes
Modifier and Type Class and Description
static class  SwaptionAnalyticApproximation.ValueUnit
• ### Constructor Summary

Constructors
Constructor and Description
SwaptionAnalyticApproximation(double swaprate, double[] swapTenor, SwaptionAnalyticApproximation.ValueUnit valueUnit)
Create an analytic swaption approximation product for log normal forward rate model.
SwaptionAnalyticApproximation(double swaprate, TimeDiscretizationInterface swapTenor)
Create an analytic swaption approximation product for log normal forward rate model.
• ### Method Summary

All Methods
Modifier and Type Method and Description
static double[][][] getIntegratedLIBORCovariance(LIBORMarketModel model)
Map<String,double[]> getLogSwaprateDerivative(TimeDiscretizationInterface liborPeriodDiscretization, DiscountCurveInterface discountCurveInterface, ForwardCurveInterface forwardCurveInterface)
This function calculate the partial derivative d log(S) / d log(Lk) for a given swap rate with respect to a vector of forward rates (on a given forward rate tenor).
RandomVariableInterface getValue(double evaluationTime, LIBORModelMonteCarloSimulationInterface model)
This method returns the value random variable of the product within the specified model, evaluated at a given evalutationTime.
RandomVariableInterface getValues(double evaluationTime, LIBORMarketModelInterface model)
Calculates the approximated integrated instantaneous variance of the swap rate, using the approximation d log(S(t))/d log(L(t)) = d log(S(0))/d log(L(0)).
• ### Methods inherited from class net.finmath.montecarlo.interestrate.products.AbstractLIBORMonteCarloProduct

getFactorDrift, getValue, getValueForModifiedData, getValues
• ### Methods inherited from class net.finmath.montecarlo.AbstractMonteCarloProduct

getCurrency, getValue, getValue, getValues, getValues, getValuesForModifiedData, getValuesForModifiedData, getValuesForModifiedData, getValuesForModifiedData, toString
• ### Methods inherited from class java.lang.Object

clone, equals, finalize, getClass, hashCode, notify, notifyAll, wait, wait, wait
• ### Methods inherited from interface net.finmath.modelling.Product

getDescriptor, getValues
• ### Constructor Detail

• #### SwaptionAnalyticApproximation

public SwaptionAnalyticApproximation(double swaprate,
TimeDiscretizationInterface swapTenor)
Create an analytic swaption approximation product for log normal forward rate model. Note: It is implicitly assumed that swapTenor.getTime(0) is the exercise date (no forward starting).
Parameters:
swaprate - The strike swap rate of the swaption.
swapTenor - The swap tenor in doubles.
• #### SwaptionAnalyticApproximation

public SwaptionAnalyticApproximation(double swaprate,
double[] swapTenor,
SwaptionAnalyticApproximation.ValueUnit valueUnit)
Create an analytic swaption approximation product for log normal forward rate model. Note: It is implicitly assumed that swapTenor[0] is the exercise date (no forward starting).
Parameters:
swaprate - The strike swap rate of the swaption.
swapTenor - The swap tenor in doubles.
valueUnit - The unit of the quantity returned by the getValues method.
• ### Method Detail

• #### getValue

public RandomVariableInterface getValue(double evaluationTime,
LIBORModelMonteCarloSimulationInterface model)
Description copied from class: AbstractLIBORMonteCarloProduct
This method returns the value random variable of the product within the specified model, evaluated at a given evalutationTime. Note: For a lattice this is often the value conditional to evalutationTime, for a Monte-Carlo simulation this is the (sum of) value discounted to evaluation time. Cashflows prior evaluationTime are not considered.
Specified by:
getValue in class AbstractLIBORMonteCarloProduct
Parameters:
evaluationTime - The time on which this products value should be observed.
model - The model used to price the product.
Returns:
The random variable representing the value of the product discounted to evaluation time
• #### getValues

public RandomVariableInterface getValues(double evaluationTime,
LIBORMarketModelInterface model)
Calculates the approximated integrated instantaneous variance of the swap rate, using the approximation d log(S(t))/d log(L(t)) = d log(S(0))/d log(L(0)).
Parameters:
evaluationTime - Time at which the product is evaluated.
model - A model implementing the LIBORModelMonteCarloSimulationInterface
Returns:
Depending on the value of value unit, the method returns either the approximated integrated instantaneous variance of the swap rate (ValueUnit.INTEGRATEDVARIANCE) or the value using the Black formula (ValueUnit.VALUE).
To dos:
make initial values an arg and use evaluation time.
• #### getLogSwaprateDerivative

public Map<String,double[]> getLogSwaprateDerivative(TimeDiscretizationInterface liborPeriodDiscretization,
DiscountCurveInterface discountCurveInterface,
ForwardCurveInterface forwardCurveInterface)
This function calculate the partial derivative d log(S) / d log(Lk) for a given swap rate with respect to a vector of forward rates (on a given forward rate tenor). It also returns some useful other quantities like the corresponding discout factors and swap annuities.
Parameters:
liborPeriodDiscretization - The libor period discretization.
discountCurveInterface - The discount curve. If this parameter is null, the discount curve will be calculated from the forward curve.
forwardCurveInterface - The forward curve.
Returns:
A map containing the partial derivatives (key "value"), the discount factors (key "discountFactors") and the annuities (key "annuities") as vectors of double[] (indexed by forward rate tenor index starting at swap start)
• #### getIntegratedLIBORCovariance

public static double[][][] getIntegratedLIBORCovariance(LIBORMarketModel model)