Confronting the upfront

Posted by japari on
URL: http://quantlib.414.s1.nabble.com/Confronting-the-upfront-tp9855.html

Hi all,
I have modified the cds to include upfront and running quotes. It affects the
 cds, their engines and the calibration helpers. Although there are quite a
few changes the interfaces do not change much and existing client code will
still work (at the price of misnaming the helpers a bit... )

I have split the bootstrap helpers in two different ones, each one corresponds
 to a different quotation mode and they target a different spread in the
bootstrapping.

Upfront quotes have a standardised/conventional mapping to a 'conventional
spread', this is done by means of a conventional recovery rate (different to
the market one) and a standard model (JPM is the public/ISDA standard for
this convention mapping). This is why I included the new member, methods,
 spreads and cashflow. I have put the upfront flow in a different "leg".
There are three spreads now, the upfront, the running and the conventional.

Computing the implicit conventional is done with the library models and not
 with the JPM standard which is becoming public for .... maybe this reason?
 Anyway, so a difference might appear. Models performing interpolations on HRs
 directly rather than on the intensities or the probabilities will give
different results.

Theres an impact on the cds options so these change too but internally only.
I have forced the options to be referring to running only quoted swaps. I
havent think much on this but looks like one could model through  Blacks the
forward upfront in the same way the forward running is. But what I am not
sure is that a Black forward running model is compatible with (implies also
a) a Black forward upfront and what the relation among the volatilies are
now.
I have no idea how the options are going to be quoted now. There is the
possibility of performing a transformation in another constructor to a
running only equivalent underlying cds and continue as it is.
Anyone has experience on this, or from another context, FI?

There are a few decissions on legs and helpers with which you might disagree,
 please do comment on these.
For instance the way the BPS is interpreted now. Or I have added schedule to
the helpers as a member, this might increase compilation time.

Luigi, do you think this code can be included for the next release? I have
taken the pain of writting it in two flavours, the old and new interfaces so
anyone can test it.

Regards
Pepe


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