/**
* 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 com.opengamma.analytics.financial.model.option.definition.PoweredOptionDefinition;
import com.opengamma.analytics.financial.model.option.definition.StandardOptionDataBundle;
import com.opengamma.analytics.financial.model.option.pricing.OptionPricingException;
import com.opengamma.analytics.math.function.Function1D;
import com.opengamma.analytics.math.statistics.distribution.NormalDistribution;
import com.opengamma.analytics.math.statistics.distribution.ProbabilityDistribution;
/**
* Analytic pricing model for powered options. *This model is only valid for options with an integer power.*
* <p>
* The price of a powered option is:
* $$
* \begin{align*}
* c &= \sum_{j=0}^i \frac{i!}{j!(i-j)!}S^{i-j}(-K)^j e^{(i-j-1)(r + (i-j)\frac{\sigma^2}{2})T - (i-j)(r-b)T}N(d_{i,j})\\
* p &= \sum_{j=0}^i \frac{i!}{j!(i-j)!}(-S)^{i-j}K^j e^{(i-j-1)(r + (i-j)\frac{\sigma^2}{2})T - (i-j)(r-b)T}N(-d_{i,j})\\
* \end{align*}
* $$
* where
* $$
* \begin{align*}
* d_{i,j} = \frac{\ln(\frac{S}{K}) + (b + (i - j - \frac{1}{2})\sigma^2)T}{\sigma\sqrt{T}}
* \end{align*}
* $$
*
*/
public class PoweredOptionModel extends AnalyticOptionModel<PoweredOptionDefinition, StandardOptionDataBundle> {
private static final ProbabilityDistribution<Double> NORMAL = new NormalDistribution(0, 1);
/**
* {@inheritDoc}
*/
@Override
public Function1D<StandardOptionDataBundle, Double> getPricingFunction(final PoweredOptionDefinition definition) {
Validate.notNull(definition);
final Function1D<StandardOptionDataBundle, Double> pricingFunction = new Function1D<StandardOptionDataBundle, Double>() {
/**
* @throws OptionPricingException If the power is not an integer.
*/
@SuppressWarnings("synthetic-access")
@Override
public Double evaluate(final StandardOptionDataBundle data) {
Validate.notNull(data);
if (Math.abs(definition.getPower() - Math.round(definition.getPower())) > 1e-15) {
throw new OptionPricingException("Analytic powered option pricing model can only be used when then power is an integer");
}
final double s = data.getSpot();
final double k = definition.getStrike();
final double t = definition.getTimeToExpiry(data.getDate());
final double b = data.getCostOfCarry();
final double r = data.getInterestRate(t);
final double sigma = data.getVolatility(t, k);
final long power = Math.round(definition.getPower());
final int sign = definition.isCall() ? 1 : -1;
final double sigmaSq = sigma * sigma;
final double sigmaT = sigma * Math.sqrt(t);
final double x = (Math.log(s / k) + t * (b - 0.5 * sigma * sigma)) / sigmaT;
long diff;
double price = 0;
for (int i = 0; i <= power; i++) {
diff = power - i;
price += getCombinatorial(power, i) * Math.pow(sign * s, diff) * Math.pow(-sign * k, i) * Math.exp((diff - 1) * (r + diff * sigmaSq / 2.) * t - diff * (r - b) * t)
* NORMAL.getCDF(sign * getD(x, diff, sigmaT, sigmaSq, t));
}
return price;
}
};
return pricingFunction;
}
long getFactorial(final long i) {
if (i == 0) {
return 1;
}
if (i <= 2) {
return i;
}
long result = 2;
for (int j = 3; j <= i; j++) {
result *= j;
}
return result;
}
long getCombinatorial(final long i, final long j) {
return getFactorial(i) / (getFactorial(j) * (getFactorial(i - j)));
}
double getD(final double x, final double diff, final double sigmaT, final double sigmaSq, final double t) {
return x + diff * sigmaSq * t / sigmaT;
}
}