Fix sign of fair upfront in ISDA engine for CDS (#1492)

lballabio · Oct 5, 2022 · b381364 · b381364
2 parents d79ef32 + a3b603c
commit b381364
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Showing 6 changed files with 300 additions and 49 deletions.
diff --git a/ql/instruments/creditdefaultswap.cpp b/ql/instruments/creditdefaultswap.cpp
@@ -84,8 +84,8 @@ namespace QuantLib {
     }
 
     void CreditDefaultSwap::init(const Schedule& schedule, BusinessDayConvention paymentConvention,
-        const DayCounter& dayCounter, const DayCounter& lastPeriodDayCounter,
-        bool rebatesAccrual, const Date& upfrontDate) {
+                                 const DayCounter& dayCounter, const DayCounter& lastPeriodDayCounter,
+                                 bool rebatesAccrual, const Date& upfrontDate) {
 
         QL_REQUIRE(!schedule.empty(), "CreditDefaultSwap needs a non-empty schedule.");
 
@@ -120,8 +120,8 @@ namespace QuantLib {
             effectiveUpfrontDate = schedule.calendar().advance(tradeDate_,
                 cashSettlementDays_, Days, paymentConvention);
         }
-        QL_REQUIRE(effectiveUpfrontDate >= protectionStart_, "The cash settlement date must not " <<
-            "be before the protection start date.");
+        QL_REQUIRE(effectiveUpfrontDate >= protectionStart_,
+                   "The cash settlement date must not be before the protection start date.");
 
         // Create the upfront payment, if one is provided.
         Real upfrontAmount = 0.0;
@@ -142,20 +142,25 @@ namespace QuantLib {
             if (tradeDate_ >= schedule.dates().front()) {
                 for (Size i = 0; i < leg_.size(); ++i) {
                     const ext::shared_ptr<CashFlow>& cf = leg_[i];
-                    if (refDate < cf->date()) {
-                        // Calculate the accrual. The most likely scenario.
-                        ext::shared_ptr<FixedRateCoupon> frc = ext::dynamic_pointer_cast<FixedRateCoupon>(cf);
-                        rebateAmount = frc->accruedAmount(refDate);
-                        break;
-                    } else if (refDate == cf->date() && i < leg_.size() - 1) {
-                        // If not the last coupon and trade date + 1 is the next coupon payment date, 
-                        // the accrual is 0 so do nothing.
+                    if (refDate > cf->date()) {
+                        // This coupon is in the past; check the next one
+                        continue;
+                    } else if (refDate == cf->date()) {
+                        // This coupon pays at the reference date.
+                        // If it's not the last coupon, the accrual is 0 so do nothing.
+                        if (i < leg_.size() - 1)
+                            rebateAmount = 0.0;
+                        else {
+                            // On last coupon
+                            ext::shared_ptr<FixedRateCoupon> frc = ext::dynamic_pointer_cast<FixedRateCoupon>(cf);
+                            rebateAmount = frc->amount();
+                        }
                         break;
                     } else {
-                        // Must have trade date + 1 >= last coupon's payment date. '>' here probably does not make
-                        // sense - should possibly have an exception above if trade date >= last coupon's date.
+                        // This coupon pays in the future, and is the first coupon to do so (since they're sorted).
+                        // Calculate the accrual and skip further coupons
                         ext::shared_ptr<FixedRateCoupon> frc = ext::dynamic_pointer_cast<FixedRateCoupon>(cf);
-                        rebateAmount = frc->amount();
+                        rebateAmount = frc->accruedAmount(refDate);
                         break;
                     }
                 }

diff --git a/ql/instruments/makecds.cpp b/ql/instruments/makecds.cpp
@@ -46,7 +46,7 @@ namespace QuantLib {
 
     MakeCreditDefaultSwap::operator ext::shared_ptr<CreditDefaultSwap>() const {
 
-        Date tradeDate = Settings::instance().evaluationDate();
+        Date tradeDate = (tradeDate_ != Null<Date>()) ? tradeDate_ : Settings::instance().evaluationDate();
         Date upfrontDate = WeekendsOnly().advance(tradeDate, cashSettlementDays_, Days);
 
         Date protectionStart;
@@ -131,4 +131,10 @@ namespace QuantLib {
         engine_ = engine;
         return *this;
     }
+
+    MakeCreditDefaultSwap& MakeCreditDefaultSwap::withTradeDate(const Date& tradeDate) {
+        tradeDate_ = tradeDate;
+        return *this;
+    }
+
 }
diff --git a/ql/instruments/makecds.hpp b/ql/instruments/makecds.hpp
@@ -53,6 +53,8 @@ namespace QuantLib {
 
         MakeCreditDefaultSwap& withPricingEngine(const ext::shared_ptr<PricingEngine>&);
 
+        MakeCreditDefaultSwap& withTradeDate(const Date& tradeDate);
+
       private:
         Protection::Side side_;
         Real nominal_;
@@ -65,6 +67,7 @@ namespace QuantLib {
         DayCounter lastPeriodDayCounter_;
         DateGeneration::Rule rule_;
         Natural cashSettlementDays_;
+        Date tradeDate_;
 
         ext::shared_ptr<PricingEngine> engine_;
     };

diff --git a/ql/pricingengines/credit/isdacdsengine.cpp b/ql/pricingengines/credit/isdacdsengine.cpp
@@ -307,14 +307,19 @@ namespace QuantLib {
                 arguments_.accrualRebate->amount();
         }
 
-        Real upfrontSign = Protection::Seller != 0U ? 1.0 : -1.0;
-
-        if (arguments_.side == Protection::Seller) {
+        Real upfrontSign = 1.0;
+        switch (arguments_.side) {
+          case Protection::Seller:
             results_.defaultLegNPV *= -1.0;
             results_.accrualRebateNPV *= -1.0;
-        } else {
+            break;
+          case Protection::Buyer:
             results_.couponLegNPV *= -1.0;
-            results_.upfrontNPV *= -1.0;
+            results_.upfrontNPV   *= -1.0;
+            upfrontSign = -1.0;
+            break;
+          default:
+            QL_FAIL("unknown protection side");
         }
 
         results_.value = results_.defaultLegNPV + results_.couponLegNPV +