Monte Carlo is bread and butter for so many purposes. Calculating payoffs for complex path-dependent products or simulating future exposures for calculating CVA are two excellent examples. The big question is always how to do this efficiently. Designing, implementing and setting up any non-trivial in-house tool to do the job is everything but not a simple afternoon exercise with a cup of coffee and Excel. Fortunately, QuantLib is offering pretty impressive tools for simulating stochastic paths. This time, I wanted to share the results of my woodshedding with QL PathGenerator class.
In order to really appreciate the tools offered by QL, let us see the results first. Some simulated paths using Hull-White One-Factor model are shown in the picture below.
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If one really want to start from the scratch, there are a lot of things to do in order to produce these paths on a flexible manner and handling all the complexities of the task at the same time. Thanks for QL, those days are finally over.
Along with required process parameters (reversion speed and rate volatility), HullWhiteProcess needs Handle to YieldTermStructure object, such as PiecewiseYieldCurve, as an input.
Finally, PathGenerator object is created by feeding desired process and generator objects in constructor method, along with the other required parameters (maturity, number of steps). After this, PathGenerator object is ready for producing stochastic paths for its client.
Thanks for reading my blog.
-Mike
Parallel lives
In order to really appreciate the tools offered by QL, let us see the results first. Some simulated paths using Hull-White One-Factor model are shown in the picture below.
If one really want to start from the scratch, there are a lot of things to do in order to produce these paths on a flexible manner and handling all the complexities of the task at the same time. Thanks for QL, those days are finally over.
Legoland
Setting up desired Stochastic Process and Gaussian Sequence Generator are two main components needed in order to get this thing up and running.
Along with required process parameters (reversion speed and rate volatility), HullWhiteProcess needs Handle to YieldTermStructure object, such as PiecewiseYieldCurve, as an input.
// create Hull-White one-factor stochastic process
Real reversionSpeed =0.75;
Real rateVolatility =0.015;
boost::shared_ptr<StochasticProcess1D> HW1F(
new HullWhiteProcess(curveHandle, reversionSpeed, rateVolatility));
// type definition for complex declaration
typedef RandomSequenceGenerator<CLGaussianRng<MersenneTwisterUniformRng>> GSG;
//
// create mersenne twister uniform random generator
unsignedlong seed =28749;
MersenneTwisterUniformRng generator(seed);
//
// create gaussian generator by using central limit transformation method
CLGaussianRng<MersenneTwisterUniformRng> gaussianGenerator(generator);
//
// define maturity, number of steps per path and create gaussian sequence generator
Time maturity =5.0;
Size nSteps =1250;
GSG gaussianSequenceGenerator(nSteps, gaussianGenerator);
//
// create path generator using Hull-White process and gaussian sequence generator
PathGenerator<GSG> pathGenerator(HW1F, maturity, nSteps, gaussianSequenceGenerator, false);
Finally, PathGenerator object is created by feeding desired process and generator objects in constructor method, along with the other required parameters (maturity, number of steps). After this, PathGenerator object is ready for producing stochastic paths for its client.
The program
Example program will first create relinkable handle to PiecewiseYieldCurve object. Remember to include required files into your project from here. After this, the program creates HW1F process object and Gaussian Sequence Generator object, which are feeded into PathGenerator object. Finally, the program creates 20 stochastic paths, which are saved into Matrix object and ultimately being printed into text file for further analysis (Excel chart).
#include "PiecewiseCurveBuilder.cpp"
#include <fstream>
#include <string>
//
// type definition for complex declaration
typedef RandomSequenceGenerator<CLGaussianRng<MersenneTwisterUniformRng>> GSG;
//
// function prototypes
RelinkableHandle<YieldTermStructure> CreateCurveHandle(Date settlementDate);
voidPrintMatrix(const Matrix& matrix, std::string filePathName);
//
intmain()
{
// request handle for piecewise USD Libor curve
Date tradeDate(22, January, 2016);
Settings::instance().evaluationDate() = tradeDate;
Date settlementDate = UnitedKingdom().advance(tradeDate, 2, Days);
RelinkableHandle<YieldTermStructure> curveHandle = CreateCurveHandle(settlementDate);
//
// create Hull-White one-factor stochastic process
Real reversionSpeed =0.75;
Real rateVolatility =0.015;
boost::shared_ptr<StochasticProcess1D> HW1F(
new HullWhiteProcess(curveHandle, reversionSpeed, rateVolatility));
//
// create mersenne twister uniform random generator
unsignedlong seed =28749;
MersenneTwisterUniformRng generator(seed);
//
// create gaussian generator by using central limit transformation method
CLGaussianRng<MersenneTwisterUniformRng> gaussianGenerator(generator);
//
// define maturity, number of steps per path and create gaussian sequence generator
Time maturity =5.0;
Size nSteps =1250;
GSG gaussianSequenceGenerator(nSteps, gaussianGenerator);
//
// create path generator using Hull-White process and gaussian sequence generator
PathGenerator<GSG> pathGenerator(HW1F, maturity, nSteps, gaussianSequenceGenerator, false);
//
// create matrix container for 20 generated paths
Size nColumns =20;
Matrix paths(nSteps +1, nColumns);
for(unsignedint i =0; i != paths.columns(); i++)
{
// request a new stochastic path from path generator
QuantLib::Sample<Path> path = pathGenerator.next();
//
// save generated path into container
for(unsignedint j =0; j != path.value.length(); j++)
{
paths[j][i] = path.value.at(j);
}
}
// finally, print matrix content into text file
PrintMatrix(paths, "C:\\temp\\HW1F.txt");
return0;
}
//
voidPrintMatrix(const Matrix& matrix, std::string filePathName)
{
// open text file for input, loop through matrix rows
std::ofstream file(filePathName);
for(unsignedint i =0; i != matrix.rows(); i++)
{
// concatenate column values into string separated by semicolon
std::string stream;
for(unsignedint j =0; j != matrix.columns(); j++)
{
stream += (std::to_string(matrix[i][j]) +";");
}
// print string into text file
file << stream << std::endl;
}
// close text file
file.close();
}
//
RelinkableHandle<YieldTermStructure> CreateCurveHandle(Date settlementDate)
{
// create curve builder for piecewise USD Libor swap curve
PiecewiseCurveBuilder<USDLibor> USDCurveBuilder(settlementDate,
UnitedKingdom(), Annual, Thirty360());
//
// add quotes directly into curve builder
USDCurveBuilder.AddDeposit(0.0038975, 1* Weeks);
USDCurveBuilder.AddDeposit(0.004295, 1* Months);
USDCurveBuilder.AddDeposit(0.005149, 2* Months);
USDCurveBuilder.AddDeposit(0.006127, 3* Months);
USDCurveBuilder.AddFRA(0.008253, 3* Months, 3* Months);
USDCurveBuilder.AddFRA(0.009065, 6* Months, 3* Months);
USDCurveBuilder.AddFRA(0.01059, 9* Months, 3* Months);
USDCurveBuilder.AddSwap(0.011459, 2* Years);
USDCurveBuilder.AddSwap(0.013745, 3* Years);
USDCurveBuilder.AddSwap(0.015475, 4* Years);
USDCurveBuilder.AddSwap(0.016895, 5* Years);
USDCurveBuilder.AddSwap(0.01813, 6* Years);
USDCurveBuilder.AddSwap(0.019195, 7* Years);
USDCurveBuilder.AddSwap(0.020115, 8* Years);
USDCurveBuilder.AddSwap(0.020905, 9* Years);
USDCurveBuilder.AddSwap(0.021595, 10* Years);
USDCurveBuilder.AddSwap(0.0222, 11* Years);
USDCurveBuilder.AddSwap(0.022766, 12* Years);
USDCurveBuilder.AddSwap(0.0239675, 15* Years);
USDCurveBuilder.AddSwap(0.025105, 20* Years);
USDCurveBuilder.AddSwap(0.025675, 25* Years);
USDCurveBuilder.AddSwap(0.026015, 30* Years);
USDCurveBuilder.AddSwap(0.026205, 40* Years);
USDCurveBuilder.AddSwap(0.026045, 50* Years);
//
// return relinkable curve handle
return USDCurveBuilder.GetCurveHandle();
}
Thanks for reading my blog.
-Mike