QuantLib - Re: Adding a payoff function

Re: Adding a payoff function

Posted by Wujiang Lou on
URL: http://quantlib.414.s1.nabble.com/Adding-a-payoff-function-tp2939p2943.html

An example to the point: some energy/commodity contracts use last n days' average as exercise price vs a fixed strike. Here your payoff is path and t dependent. So an operator (or function) like averagePrice(Path) needs to be overloaded with (Path, t, n) where n is indeed a fixed number more like an attribute. Things can get more complicated as we need to know how often State is sampled in time... It's probably better just to put them in a class instead of writing separate functions.
Another point is Path could be of number of states, like 2 states in an outperformance or spread option (s1-k*s2). (template could certainly help.)
But conceptually a sig of operator(Path, t) should be general enough, leaving other details to payoff object.
Things could get dirty like a default payoff with stochastic recovery rate on a market value of no-default... But nonetheless we could treat both recovery rate and the market value of the no-default instrument as additional states to be included in the Path.
A more realistic exercise is bond option in either MC and lattice setting.

Nicolas Magnette wrote:

Luigi,
this is exactly what I applied to solve my problem. I
calculate the average in a separate function of my
pricing engine, which is certainly not the best to do.
Changin the signature of the () operator could be
nice, as my payoff is not the only one that uses a
time argument.
Sincerely,
Nicolas
En réponse à Luigi Ballabio
<[hidden email]>:
> On 2004.05.19 14:50, Daniel J. Duffy wrote:
> > I am not familiar with pattern Path; it is not a
GOF pattern.
>
> Hi,
>       I think he meant that since payoffs can be
path-dependent,
> Payoff::operator() should be allowed to take a path,
too.
> At ths time, our take is that e.g., instead of
writing
>
> AveragePricePayoff payoff(Call, strike);
> p = payoff(path);
>
> one is probably better off writing
>
> PlainVanillaPayoff payoff(Call, strike);
> p = payoff(averagePrice(path));
>
> which has the merit of separating the two concerns
of averaging and
> calculating the payoff.
>
> The fact that a payoff could be intrinsically
dependent on time is
> another matter, though. Maybe we should augment the
signature of
> Payoff::operator() to take a time argument as well...
>
> Later,
>       Luigi
>
>
> > -----Original Message-----
> > From: [hidden email]
> > [[hidden email]]
On Behalf Of
> > Wujiang Lou
> > Sent: 19 May 2004 14:38
> > To: [hidden email]
> > Cc: [hidden email];
> > [hidden email]
> > Subject: Re: [Quantlib-users] Adding a payoff
function
> >
> >
> > A more general and extensible payoff class would
need implementation
> > of concept of State or Path, instead of one
argument or two
> > arguments.
> >
> > Your operator() then has two signatures, one
taking in a State while
> > the other takes in a Path for Path dependent
payoffs.
> > -wujiang
> >
> > Luigi Ballabio wrote:
> >
> >
> > On 2004.05.19 11:20, Nicolas Magnette wrote:
> > > Here is my modified payoff. I had to add a
> > > funstion "eval" as I need the calculation of the
> > > payoff to take more than one argument and this is
> > > impossible with the operator which is standard
for all
> > > payoffs.
> > >
> > >     class MyPayoff : public StrikedTypePayoff {
> > >     public:
> > >         MyPayoff(...)
> > >         : ... {}
> > >         double operator()(double price) const;
> > >         double eval(double price, Time
time_elapsed) const;
> > >         ...
> > >      private:
> > >          ...
> > >     };
> > >
> > >     inline double MyPayoff::eval(double price,
Time
> > > time_elapsed) const {
> > >       ...
> > > }
> >
> > Nicolas,
> >         besides declaring it, did you actually
define operator()
> > somewhere?
> >
> >
> > Later,
> >         Luigi
> >
> >
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