fix the deltas computation when non constant tranche spread

code is quite ugly, need to make it better

1 files changed, 44 insertions, 13 deletions

diff --git a/R/tranche_functions.R b/R/tranche_functions.R
index b21094f..2743efd 100644
--- a/R/tranche_functions.R
+++ b/R/tranche_functions.R
@@ -658,7 +658,7 @@ BClossdistC <- function(defaultprob, issuerweights, recov, rho, Z, w,
 }

 

 BCtranche.pv <- function(index, K1, K2, rho1, rho2,

-                         Z, w, N=length(index$issuerweights)+1){

+                         Z, w, N=length(index$issuerweights)+1, protection=FALSE){

     ## computes the protection leg, couponleg, and bond price of a tranche

     ## in the base correlation setting

     if(K1==0){

@@ -675,8 +675,13 @@ BCtranche.pv <- function(index, K1, K2, rho1, rho2,
     cl1 <- tranche.cl(dist1$L, dist1$R, index$cs, 0, K1)

     pl2 <- tranche.pl(dist2$L, index$cs, 0, K2)

     pl1 <- tranche.pl(dist1$L, index$cs, 0, K1)

-    return(list(pl=(pl2-pl1)/dK, cl=(cl2-cl1)/dK,

-                bp=100*(1+(pl2-pl1+cl2-cl1)/dK)))

+

+    if(protection){

+        bp <- (pl1-pl2+cl1-cl2)/dK

+    }else{

+        bp <- 100*(1-(pl2-pl1+cl2-cl1)/dK)

+    }

+    return(list(pl=(pl2-pl1)/dK, cl=(cl2-cl1)/dK, bp=bp))

 }

 

 BCtranche.delta <- function(index, Z, w, N=length(index$portolio)+1, tradedate = Sys.Date()){

@@ -706,22 +711,48 @@ BCtranche.delta <- function(index, Z, w, N=length(index$portolio)+1, tradedate =
         indexpv(index, tradedate = tradedate, clean = FALSE)$bp

     dPVindex1 <- indexpv(indexplus, tradedate = tradedate, clean = FALSE)$bp-

         indexpv(index, tradedate = tradedate, clean = FALSE)$bp

-    bpplus <- 0

-    bpminus <- 0

-    bp <- 0

-    bp2plus <- 0

+    clplus <- 0

+    clminus <- 0

+    cl <- 0

+    cl2plus <- 0

+    plplus <- 0

+    plminus <- 0

+    pl <- 0

+    pl2plus <- 0

+    bp <- c()

+    bpplus <- c()

+    bpminus <- c()

+    bp2plus <- c()

+    index$cs$coupons <- index$cs$coupons/index$spreadref

     for(i in 1:(length(index$rho)-2)){

         dist <- BClossdistC(index$defaultprob, index$issuerweights, index$recov, index$rho[i+1], Z, w, N)

         distplus <- BClossdistC(indexplus$defaultprob, index$issuerweights, index$recov, index$rho[i+1], Z, w, N)

         distminus <- BClossdistC(indexminus$defaultprob, index$issuerweights, index$recov, index$rho[i+1], Z, w, N)

         dist2plus <- BClossdistC(index2plus$defaultprob, index$issuerweights, index$recov, index$rho[i+1], Z, w, N)

-        bp <- c(bp, tranche.pv(dist$L, dist$R, index$cs, 0, index$K[i+1]))

-        bpplus <- c(bpplus, tranche.pv(distplus$L, distplus$R, index$cs, 0, index$K[i+1]))

-        bpminus <- c(bpminus, tranche.pv(distminus$L, distminus$R, index$cs, 0, index$K[i+1]))

-        bp2plus <- c(bp2plus, tranche.pv(dist2plus$L, dist2plus$R, index$cs, 0, index$K[i+1]))

+        #shock all the coupon legs

+        cl <- c(cl, tranche.cl(dist$L, dist$R, index$cs, 0, index$K[i+1]))

+        clplus <- c(clplus, tranche.cl(distplus$L, distplus$R, index$cs, 0, index$K[i+1]))

+        clminus <- c(clminus, tranche.cl(distminus$L, distminus$R, index$cs, 0, index$K[i+1]))

+        cl2plus <- c(cl, tranche.cl(dist2plus$L, dist2plus$R, index$cs, 0, index$K[i+1]))

+        #shock all the protection legs

+        pl <- c(pl, tranche.pl(dist$L, index$cs, 0, index$K[i+1]))

+        plplus <- c(plplus, tranche.pl(distplus$L, index$cs, 0, index$K[i+1]))

+        plminus <- c(plminus, tranche.pl(distminus$L, index$cs, 0, index$K[i+1]))

+        pl2plus <- c(pl2plus, tranche.pl(dist2plus$L, index$cs, 0, index$K[i+1]))

+    }

+    for(i in 2:(length(cl))){

+        dK <- index$K[i]-index$K[i-1]

+        bp <- c(bp, (pl[i]+cl[i]*index$tranche.running[i]-(pl[i-1]+cl[i-1]*index$tranche.running[i]))/dK)

+        bpplus <- c(bpplus, (plplus[i]+clplus[i]*index$tranche.running[i]-

+                             (plplus[i-1]+clplus[i-1]*index$tranche.running[i]))/dK)

+        bpminus <- c(bpminus, (plminus[i]+clminus[i]*index$tranche.running[i]-

+                               (plminus[i-1]+clminus[i-1]*index$tranche.running[i]))/dK)

+        bp2plus <- c(bp2plus, (pl2plus[i]+cl2plus[i]*index$tranche.running[i]-

+                               (pl2plus[i-1]+cl2plus[i-1]*index$tranche.running[i]))/dK)

+

     }

-    dPVtranche <- 1/diff(index$K[-length(index$K)])*(diff(bpplus) - diff(bpminus))

-    dPVtranche2 <-  1/diff(index$K[-length(index$K)])*(diff(bp2plus) - diff(bp))

+    dPVtranche <- bpplus-bpminus

+    dPVtranche2 <-  bp2plus - bp

 

     deltas <- dPVtranche/dPVindex

     ##might need to check that in case of non 1 factor