Merge branch 'feature/QPR-13507' into 'master'

QPR-13507 constituent curve calibration of index cds and index cds options

Closes QPR-13507

See merge request qs/oreplus!3038

Author: pcaspers

Docs/UserGuide/pricing/pricingengines.tex

@@ -1823,6 +1823,10 @@ \subsection{Product Type: IndexCreditDefaultSwap}
 \item Curve: Index, Underlying
 \item SensitivityDecomposition: Underlying, NotionalWeighted, LossWeighted, DeltaWeighted
 \item SensitivityTemplate [optional]: the sensitivity template to use 
+\item CalibrateUnderlyingCurves [optional]: Only applies when Curve is set to Underlying. 
+If true, it apply a spread to the the individual constituent curves to match the index CDS spread. 
+This ensures that pricing the index CDS using underlying curves produces the same NPV as pricing with the index curve directly. Defaults to false.
+(See Calibration of default curves for index tranches for details.)
 \end{itemize}
 
 \begin{longlisting}
@@ -1835,6 +1839,7 @@ \subsection{Product Type: IndexCreditDefaultSwap}
         <Parameter name="Curve">Index</Parameter>
         <Parameter name="SensitivityDecomposition">DeltaWeighted</Parameter>
         <Parameter name="SensitivityTemplate">IR_Analytical</Parameter>
+        <Parameter name="CalibrateUnderlyingCurves">false</Parameter>
     </EngineParameters>
 </Product>
 \end{minted}
@@ -1867,6 +1872,10 @@ \subsection{Product Type: IndexCreditDefaultSwapOption}
 \item FepCurve: Index, Underlying
 \item SensitivityDecomposition: Underlying, NotionalWeighted, LossWeighted, DeltaWeighted
 \item SensitivityTemplate [optional]: the sensitivity template to use 
+\item CalibrateUnderlyingCurves [optional]: Only applies when Curve or FepCurve is set to Underlying. 
+If true, it apply a spread to the the individual constituent curves to match the index CDS spread. 
+This ensures that pricing the index CDS using underlying curves produces the same NPV as pricing with the index curve directly. Defaults to false.
+(See Calibration of default curves for index tranches for details.)
 \end{itemize}
 
 \begin{longlisting}
@@ -1898,6 +1907,10 @@ \subsection{Product Type: IndexCreditDefaultSwapOption}
 \item FepCurve: Index, Underlying
 \item SensitivityDecomposition: Underlying, NotionalWeighted, LossWeighted, DeltaWeighted
 \item SensitivityTemplate [optional]: the sensitivity template to use 
+\item CalibrateUnderlyingCurves [optional]: Only applies when Curve or FepCurve is set to Underlying. 
+If true, it apply a spread to the the individual constituent curves to match the index CDS spread. 
+This ensures that pricing the index CDS using underlying curves produces the same NPV as pricing with the index curve directly. Defaults to false.
+(See Calibration of default curves for index tranches for details.)
 \end{itemize}
 
 \begin{longlisting}

OREData/ored/marketdata/basecorrelationcurve.cpp

@@ -509,8 +509,7 @@ void BaseCorrelationCurve::buildFromUpfronts(const Date& asof, const BaseCorrela
                 dpts.push_back(creditCurve->curve());
             }
 
-            Handle<DefaultProbabilityTermStructure> indexCurve;
-            Handle<Quote> indexRecovery;
+            
             Handle<YieldTermStructure> discountCurve;
             // check if curveID has term suffix already (e.g. "RED:ABCDEFGH_5Y"), if so use that, otherwise use term from config
             auto p = ore::data::splitCurveIdWithTenor(config.curveID());
@@ -525,12 +524,9 @@ void BaseCorrelationCurve::buildFromUpfronts(const Date& asof, const BaseCorrela
             QL_REQUIRE(indexCreditCurve != nullptr,
                        "Can not imply base correlation, index credit curve " << indexNameWithTerm << " missing");
             discountCurve = indexCreditCurve->rateCurve();
-            indexCurve = indexCreditCurve->curve();
-            indexRecovery = indexCreditCurve->recovery();
-
+            
             if (config.calibrateConstituentsToIndexSpread()) {
-                auto curveCalibration = ext::make_shared<QuantExt::CreditIndexConstituentCurveCalibration>(
-                    config.startDate(), term, config.indexSpread(), indexRecovery, indexCurve, discountCurve);
+                auto curveCalibration = ext::make_shared<QuantExt::CreditIndexConstituentCurveCalibration>(indexCreditCurve);
 
                 auto calibrationResults = curveCalibration->calibratedCurves(
                     basketData.remainingNames, basketData.remainingWeights, dpts, recoveryRates);

OREData/ored/marketdata/defaultcurve.cpp

@@ -336,11 +336,12 @@ void DefaultCurve::buildCdsCurve(const std::string& curveID, const DefaultCurveC
     refData.tenor = Period(cdsConv->frequency());
     refData.calendar = cdsConv->calendar();
     refData.convention = cdsConv->paymentConvention();
-    refData.termConvention = cdsConv->paymentConvention();
+    refData.termConvention = Unadjusted;
     refData.rule = cdsConv->rule();
     refData.payConvention = cdsConv->paymentConvention();
     refData.dayCounter = cdsConv->dayCounter();
-    refData.lastPeriodDayCounter = cdsConv->lastPeriodDayCounter();
+    if (cdsConv->lastPeriodDayCounter() != DayCounter())
+        refData.lastPeriodDayCounter = cdsConv->lastPeriodDayCounter();
     refData.cashSettlementDays = cdsConv->upfrontSettlementDays();
 
     // If the configuration instructs us to imply a default from the market data, we do it here.

OREData/ored/portfolio/builders/indexcreditdefaultswap.cpp

@@ -16,11 +16,12 @@
  FITNESS FOR A PARTICULAR PURPOSE. See the license for more details.
 */
 
-#include <ored/portfolio/builders/indexcreditdefaultswap.hpp>
 #include <qle/pricingengines/midpointindexcdsengine.hpp>
+#include <qle/utilities/creditindexconstituentcurvecalibration.hpp>
 
-#include <ored/utilities/marketdata.hpp>
+#include <ored/portfolio/builders/indexcreditdefaultswap.hpp>
 #include <ored/utilities/log.hpp>
+#include <ored/utilities/marketdata.hpp>
 #include <ored/utilities/to_string.hpp>
 
 #include <boost/make_shared.hpp>
@@ -36,23 +37,29 @@ CreditPortfolioSensitivityDecomposition IndexCreditDefaultSwapEngineBuilder::sen
 vector<string> IndexCreditDefaultSwapEngineBuilder::keyImpl(const Currency& ccy, const string& creditCurveId,
                                                             const vector<string>& creditCurveIds,
                                                             const QuantLib::ext::optional<string>& overrideCurve,
-                                                            Real recoveryRate, const bool inCcyDiscountCurve) {
+                                                            const QuantLib::ext::optional<bool>& calibrateConstituentCurvesOverride,
+                                                            const std::vector<double>& constituentNotional, Real recoveryRate, 
+                                                            const bool inCcyDiscountCurve) {
     vector<string> res{ccy.code()};
     res.insert(res.end(), creditCurveIds.begin(), creditCurveIds.end());
     res.push_back(creditCurveId);
     res.push_back(overrideCurve ? *overrideCurve : "");
     if (recoveryRate != Null<Real>())
         res.push_back(to_string(recoveryRate));
     res.push_back(inCcyDiscountCurve ? "1" : "0");
+    res.push_back(
+        calibrateConstituentCurvesOverride.has_value() ? (calibrateConstituentCurvesOverride.value() ? "1" : "0") : "");
     return res;
 }
 
 QuantLib::ext::shared_ptr<PricingEngine> MidPointIndexCdsEngineBuilder::engineImpl(
     const Currency& ccy, const string& creditCurveId, const vector<string>& creditCurveIds,
-    const QuantLib::ext::optional<string>& overrideCurve, Real recoveryRate, const bool inCcyDiscountCurve) {
+    const QuantLib::ext::optional<string>& overrideCurve,
+    const QuantLib::ext::optional<bool>& calibrateConstituentCurvesOverride,
+    const std::vector<double>& constituentNotionals, Real recoveryRate, const bool inCcyDiscountCurve) {
 
     std::string curve = overrideCurve ? *overrideCurve : engineParameter("Curve", {}, false, "Underlying");
-
+    
     if (curve == "Index") {
         auto creditCurve = indexCdsDefaultCurve(market_, creditCurveId, configuration(MarketContext::pricing));
         Handle<Quote> mktRecovery = market_->recoveryRate(creditCurveId, configuration(MarketContext::pricing));
@@ -70,10 +77,52 @@ QuantLib::ext::shared_ptr<PricingEngine> MidPointIndexCdsEngineBuilder::engineIm
             dpts.push_back(tmp->curve());
             recovery.push_back(recoveryRate != Null<Real>() ? recoveryRate : tmp2->value());
         }
-        return QuantLib::ext::make_shared<QuantExt::MidPointIndexCdsEngine>(
-            dpts, recovery,
-            market_->discountCurve(
-                ccy.code(), configuration(inCcyDiscountCurve ? MarketContext::irCalibration : MarketContext::pricing)));
+        auto discountCurve = market_->discountCurve(
+                ccy.code(), configuration(inCcyDiscountCurve ? MarketContext::irCalibration : MarketContext::pricing));
+
+        bool calibrateConstituentCurves =
+            calibrateConstituentCurvesOverride
+                ? *calibrateConstituentCurvesOverride
+                : parseBool(engineParameter("CalibrateUnderlyingCurves", {}, false, "false"));
+        std::string runType = "";
+        auto it = globalParameters_.find("RunType");
+        if (it != globalParameters_.end()) {
+            runType = it->second;
+        }
+        calibrateConstituentCurves = calibrateConstituentCurves && runType != "PortfolioAnalyser";
+        if (calibrateConstituentCurves) {
+            TLOG("IndexCreditDefaultSwap: Calibrate constituent curves to index spread");
+            QL_REQUIRE(!creditCurveId.empty(),
+                       "IndexCreditDefaultSwap: cannot calibrate constituent curves to index spread "
+                       "if index credit curve ID is not set");
+            auto indexCreditCurve = indexCdsDefaultCurve(market_, creditCurveId, configuration(MarketContext::pricing));
+            QL_REQUIRE(indexCreditCurve->refData().startDate != Null<Date>(),
+                       "IndexCreditDefaultSwap: cannot calibrate constituent curves to index spread "
+                       "if index credit curve start date is not set, please check index credit curve configuration");
+            QL_REQUIRE(indexCreditCurve->refData().indexTerm != 0 * Days,
+                       "IndexCreditDefaultSwap: cannot calibrate constituent curves to index spread "
+                       "if index credit curve index term is not set, please check index credit curve configuration");
+            QL_REQUIRE(indexCreditCurve->refData().runningSpread != Null<Real>(),
+                       "IndexCreditDefaultSwap: cannot calibrate constituent curves to index spread "
+                       "if index credit curve running spread is not set, please check index credit curve configuration");
+            auto curveCalibration = ext::make_shared<QuantExt::CreditIndexConstituentCurveCalibration>(indexCreditCurve);
+            auto res = curveCalibration->calibratedCurves(creditCurveIds, constituentNotionals, dpts, recovery);
+            TLOG("Calibration success: " << res.success);            
+            if (res.success) {
+                TLOG("maturity,marketNPV,impliedNPV,calibrationFactor:");
+                for (Size i = 0; i < res.marketNpv.size(); ++i) {
+                    TLOG(res.cdsMaturity[i] << res.marketNpv[i] << "," << res.impliedNpv[i] << ","
+                                            << res.calibrationFactor[i]);
+                }
+                dpts = res.curves;
+            } else {
+                ALOG("IndexCreditDefaultSwap: Calibration of constituent curves to index spread failed, "
+                     "proceeding with non-calibrated "
+                     "curves. Got "
+                     << res.errorMessage << " continue with non-calibrated curves.");
+            }
+        }
+        return QuantLib::ext::make_shared<QuantExt::MidPointIndexCdsEngine>(dpts, recovery, discountCurve);
     } else {
         QL_FAIL("MidPointIndexCdsEngineBuilder: Curve Parameter value \""
                 << engineParameter("Curve") << "\" not recognised, expected Underlying or Index");

OREData/ored/portfolio/builders/indexcreditdefaultswap.hpp

@@ -40,7 +40,8 @@ namespace data {
 
 class IndexCreditDefaultSwapEngineBuilder
     : public CachingPricingEngineBuilder<vector<string>, const Currency&, const string&, const vector<string>&,
-                                         const QuantLib::ext::optional<string>&, Real, bool> {
+                                         const QuantLib::ext::optional<string>&, const QuantLib::ext::optional<bool>&,
+                                         const std::vector<double>&, Real, bool> {
 
 public:
     CreditPortfolioSensitivityDecomposition sensitivityDecomposition();
@@ -50,8 +51,10 @@ class IndexCreditDefaultSwapEngineBuilder
         : CachingEngineBuilder(model, engine, {"IndexCreditDefaultSwap"}) {}
 
     vector<string> keyImpl(const Currency& ccy, const string& creditCurveId, const vector<string>& creditCurveIds,
-                           const QuantLib::ext::optional<string>& overrideCurve, Real recoveryRate = Null<Real>(),
-                           const bool inCcyDiscountCurve = false) override;
+                           const QuantLib::ext::optional<string>& overrideCurve,
+                           const QuantLib::ext::optional<bool>& calibrateConstituentCurvesOverride,
+                           const std::vector<double>& constituentNotionals, 
+                           Real recoveryRate = Null<Real>(), const bool inCcyDiscountCurve = false) override;
 };
 
 //! Midpoint Engine Builder class for IndexCreditDefaultSwaps
@@ -68,6 +71,8 @@ class MidPointIndexCdsEngineBuilder : public IndexCreditDefaultSwapEngineBuilder
     QuantLib::ext::shared_ptr<PricingEngine> engineImpl(const Currency& ccy, const string& creditCurveId,
                                                 const vector<string>& creditCurveIds,
                                                 const QuantLib::ext::optional<string>& overrideCurve,
+                                                const QuantLib::ext::optional<bool>& calibrateConstituentCurvesOverride,
+                                                const std::vector<double>& constituentNotionals,
                                                 Real recoveryRate = Null<Real>(),
                                                 const bool inCcyDiscountCurve = false) override;
 };