/**
* Copyright (C) 2009 - present by OpenGamma Inc. and the OpenGamma group of companies
*
* Please see distribution for license.
*/
package com.opengamma.analytics.financial.model.volatility.curve;
import org.apache.commons.lang.Validate;
import com.opengamma.analytics.financial.model.option.definition.FXOptionDataBundle;
import com.opengamma.analytics.math.curve.FunctionalDoublesCurve;
import com.opengamma.analytics.math.function.Function1D;
import com.opengamma.analytics.math.statistics.distribution.NormalDistribution;
import com.opengamma.analytics.math.statistics.distribution.ProbabilityDistribution;
import com.opengamma.util.time.DateUtils;
/**
*
*/
public class FXVannaVolgaVolatilityCurveModel implements VolatilityCurveModel<FXVannaVolgaVolatilityCurveDataBundle, FXOptionDataBundle> {
private static final ProbabilityDistribution<Double> NORMAL = new NormalDistribution(0, 1);
@Override
public VolatilityCurve getCurve(final FXVannaVolgaVolatilityCurveDataBundle marketQuotes, final FXOptionDataBundle data) {
Validate.notNull(marketQuotes);
Validate.notNull(data);
final double sigmaRR = marketQuotes.getRiskReversal();
final double sigmaATM = marketQuotes.getAtTheMoney();
final double sigmaVWB = marketQuotes.getVegaWeightedButterfly();
final double sigmaDeltaCall = sigmaVWB + sigmaATM + 0.5 * sigmaRR;
final double sigmaDeltaPut = sigmaDeltaCall - sigmaRR;
final double t = DateUtils.getDifferenceInYears(data.getDate(), marketQuotes.getMaturity());
if (t < 0) {
throw new IllegalArgumentException("Cannot have date after time to maturity");
}
final double sqrtT = Math.sqrt(t);
final double s = data.getSpot();
final double rd = data.getInterestRate(t);
final double rf = data.getForeignInterestRate(t);
final double alpha = -NORMAL.getInverseCDF(Math.exp(rf * t) * marketQuotes.getDelta());
final double k1 = s * Math.exp(-alpha * sigmaDeltaPut * sqrtT + t * (rd - rf + 0.5 * sigmaDeltaPut * sigmaDeltaPut));
final double k2 = s * Math.exp(t * (rd - rf + 0.5 * sigmaATM * sigmaATM));
final double k3 = s * Math.exp(alpha * sigmaDeltaCall * sqrtT + t * (rd - rf + 0.5 * sigmaDeltaCall * sigmaDeltaCall));
final double lnk21 = Math.log(k2 / k1);
final double lnk31 = Math.log(k3 / k1);
final double lnk32 = Math.log(k3 / k2);
final double sigma = sigmaATM;
return new VolatilityCurve(FunctionalDoublesCurve.from(new Function1D<Double, Double>() {
@SuppressWarnings("synthetic-access")
@Override
public Double evaluate(final Double x) {
Validate.notNull(x);
final double k = x;
final double a1 = Math.log(k2 / k) * Math.log(k3 / k) / lnk21 / lnk31;
final double a2 = Math.log(k / k1) * Math.log(k3 / k) / lnk21 / lnk32;
final double a3 = Math.log(k / k1) * Math.log(k / k2) / lnk31 / lnk32;
final double x1 = a1 * sigmaDeltaPut;
final double x2 = a2 * sigmaATM;
final double x3 = a3 * sigmaDeltaCall;
final double e1 = x1 + x2 + x3 - sigma;
final double d1k1 = getD1(s, k1, t, rd, rf, sigma, sqrtT);
final double d1k2 = getD1(s, k2, t, rd, rf, sigma, sqrtT);
final double d1k3 = getD1(s, k3, t, rd, rf, sigma, sqrtT);
final double x4 = a1 * d1k1 * getD2(d1k1, sigma, sqrtT) * (sigmaDeltaPut - sigma) * (sigmaDeltaPut - sigma);
final double x5 = a2 * d1k2 * getD2(d1k2, sigma, sqrtT) * (sigmaATM - sigma) * (sigmaATM - sigma);
final double x6 = a3 * d1k3 * getD2(d1k3, sigma, sqrtT) * (sigmaDeltaCall - sigma) * (sigmaDeltaCall - sigma);
final double e2 = x4 + x5 + x6;
final double d1k = getD1(s, k, t, rd, rf, sigma, sqrtT);
final double d2k = getD2(d1k, sigma, sqrtT);
return sigma + (-sigma + Math.sqrt(sigma * sigma + d1k * d2k * (2 * sigma * e1 + e2))) / d1k / d2k;
}
}));
}
private double getD1(final double s, final double k, final double t, final double rd, final double rf, final double sigma, final double sqrtT) {
return (Math.log(s / k) + t * (rd - rf + 0.5 * sigma * sigma)) / sigma / sqrtT;
}
private double getD2(final double d1, final double sigma, final double sqrtT) {
return d1 - sigma * sqrtT;
}
}