BenaimDodgsonKainthExtrapolationFunctionProvider.java

/**
 * Copyright (C) 2014 - present by OpenGamma Inc. and the OpenGamma group of companies
 * 
 * Please see distribution for license.
 */
package com.opengamma.analytics.financial.model.volatility.smile.fitting.interpolation;

import com.opengamma.OpenGammaRuntimeException;
import com.opengamma.analytics.financial.model.option.pricing.analytic.formula.EuropeanVanillaOption;
import com.opengamma.analytics.financial.model.option.pricing.analytic.formula.SABRExtrapolationRightFunction;
import com.opengamma.analytics.financial.model.volatility.BlackFormulaRepository;
import com.opengamma.analytics.financial.model.volatility.smile.function.SABRFormulaData;
import com.opengamma.analytics.financial.model.volatility.smile.function.VolatilityFunctionProvider;
import com.opengamma.analytics.math.function.Function1D;
import com.opengamma.util.ArgumentChecker;

/**
 * Left and right extrapolation for SABR smile interpolation based on 
 * Benaim, S., Dodgson, M., and Kainth, D. (2008). An arbitrage-free method for smile extrapolation. 
 * Technical report, Royal Bank of Scotland.
 */
public class BenaimDodgsonKainthExtrapolationFunctionProvider extends SmileExtrapolationFunctionSABRProvider {

  private final double _muLow;
  private final double _muHigh;

  /**
   * Constructor specifying parameters which control the fatness of tails
   * @param muLow The parameter for the left tail, must be positive
   * @param muHigh The parameter for the right tail, must be positive
   */
  public BenaimDodgsonKainthExtrapolationFunctionProvider(final double muLow, final double muHigh) {
    ArgumentChecker.isTrue(muLow > 0.0, "muLow should be positive");
    ArgumentChecker.isTrue(muHigh > 0.0, "muHigh should be positive");
    _muLow = muLow;
    _muHigh = muHigh;
  }

  @Override
  public Function1D<Double, Double> getExtrapolationFunction(final SABRFormulaData sabrDataLow,
      final SABRFormulaData sabrDataHigh,
      final VolatilityFunctionProvider<SABRFormulaData> volatilityFunction, final double forward, final double expiry,
      final double cutOffStrikeLow, final double cutOffStrikeHigh) {
    ArgumentChecker.notNull(sabrDataLow, "sabrDataLow");
    ArgumentChecker.notNull(sabrDataHigh, "sabrDataHigh");
    ArgumentChecker.notNull(volatilityFunction, "volatilityFunction");
    ArgumentChecker.isTrue(0.0 < cutOffStrikeLow, "cutOffStrikeLow should be positive");
    ArgumentChecker
        .isTrue(cutOffStrikeLow < cutOffStrikeHigh, "cutOffStrikeLow < cutOffStrikeHigh should be satisfied");

    final SABRExtrapolationLeftFunction sabrLeftExtrapolation = new SABRExtrapolationLeftFunction(forward, sabrDataLow,
        cutOffStrikeLow, expiry, _muLow, volatilityFunction);
    final SABRExtrapolationRightFunction sabrRightExtrapolation = new SABRExtrapolationRightFunction(forward,
        sabrDataHigh, cutOffStrikeHigh, expiry, _muHigh, volatilityFunction);

    return new Function1D<Double, Double>() {
      @Override
      public Double evaluate(final Double strike) {
        if (strike < cutOffStrikeLow) {
          EuropeanVanillaOption option = new EuropeanVanillaOption(strike, expiry, false);
          double price = sabrLeftExtrapolation.price(option);
          return BlackFormulaRepository.impliedVolatility(price, forward, strike, expiry, option.isCall());
        }
        if (strike > cutOffStrikeHigh) {
          EuropeanVanillaOption option = new EuropeanVanillaOption(strike, expiry, true);
          double price = sabrRightExtrapolation.price(option);
          return BlackFormulaRepository.impliedVolatility(price, forward, strike, expiry, option.isCall());
        }
        throw new OpenGammaRuntimeException(
            "Use smile interpolation method for cutOffStrikeLow <= strike <= cutOffStrikeHigh");
      }
    };
  }

  @Override
  public int hashCode() {
    final int prime = 31;
    int result = 1;
    long temp;
    temp = Double.doubleToLongBits(_muHigh);
    result = prime * result + (int) (temp ^ (temp >>> 32));
    temp = Double.doubleToLongBits(_muLow);
    result = prime * result + (int) (temp ^ (temp >>> 32));
    return result;
  }

  @Override
  public boolean equals(Object obj) {
    if (this == obj) {
      return true;
    }
    if (obj == null) {
      return false;
    }
    if (!(obj instanceof BenaimDodgsonKainthExtrapolationFunctionProvider)) {
      return false;
    }
    BenaimDodgsonKainthExtrapolationFunctionProvider other = (BenaimDodgsonKainthExtrapolationFunctionProvider) obj;
    if (Double.doubleToLongBits(_muHigh) != Double.doubleToLongBits(other._muHigh)) {
      return false;
    }
    if (Double.doubleToLongBits(_muLow) != Double.doubleToLongBits(other._muLow)) {
      return false;
    }
    return true;
  }
}