How To Understand The Latest Features Of F3 Excel Edition 4.3.3

Transcription

1 F3 Excel Edition Release Notes

2 F3 Excel Edition Release Notes Software Version: 4.3 Release Date: July 2014 Document Revision Number: A

3 Disclaimer FINCAD makes no warranty either express or implied, including, but not limited to, any implied warranties of merchantability or fitness for a particular purpose regarding these materials, and makes such materials available solely on an as-is basis. In no event shall FINCAD be liable to anyone for special, collateral, incidental, or consequential damages in connection with or arising out of purchase or use of these materials. This information is subject to change without notice. FINCAD assumes no responsibility for any errors in this document or their consequences, and reserves the right to make improvements and changes to this document without notice. Copyright Copyright FinancialCAD Corporation All rights reserved. Trademarks FinancialCAD and FINCAD are registered trademarks of FinancialCAD Corporation. F3 is a trademark of FinancialCAD Corporation. Other trademarks are the property of their respective holders. FINCAD makes no warranties, express or implied, in this summary. Patents Protected by U.S. Patent No Revisions Every effort has been made to ensure the accuracy of this document. FINCAD regrets any errors and omissions that may occur and would appreciate being informed of any errors found. FINCAD will correct any such errors and omissions in a subsequent version, as feasible. Please contact us at: FINCAD Central City, Suite 1750 or Block 4, Blackrock Business Park nd Avenue Carysfort Avenue, Blackrock Surrey, BC V3T 5X3 Co Dublin, Ireland Canada info@fincad.com Phone: Website: Document Information Document Name: Version: 4.3 Revision: A F3 Excel Edition Release Notes i

4 Contents 1. Introduction New Features... 1 Analytics... 1 Infrastructure Bug Fixes... 4 Analytics... 4 Infrastructure Mandatory Changes... 5 Analytics... 5 Infrastructure Known Issues... 7 Analytics... 7 Infrastructure... 9 ii

5 1. Introduction The purpose of this document is to provide high-level information on the most important new features, bug fixes, mandatory changes, and known issues affecting F3 Excel Edition. 2. New Features This section lists select new features introduced in the F3 Excel Edition 4.3 release, including minor releases since 4.2. All relevant documentation has been added or updated. Analytics The Analytics section includes new functions, arguments, and capabilities added to the F3 core library. Further details on all changes can be found in the Change Log for library versions 6.4 to 6.6, provided in the F3 Reference Manual. Local Stochastic Volatility Model The Local Stochastic Volatility (LSV) model was added. The model s local stochastic volatility surface can be created by calibrating to a Dupire local volatility surface and Heston stochastic volatility parameters using the new function ExtendModelWithHestonLocalStochasticVolatilityCurve. The surface can then be used in F3 s generic Monte Carlo engine to simulate LSV dynamics (with a Heston variance process), and to calculate the value and sensitivities of options whose underlying asset prices follow those dynamics. The new functionality related to the Local Stochastic Volatility Model is demonstrated in the workbook "Local Stochastic Volatility", found under F3 > Quant Workbooks > FX in the F3 Excel Edition ribbon. The workbook calibrates the LSV model to FX volatility market data, and then calculates the values and sensitivities of FX options (vanilla European and single barrier) using Monte Carlo simulation. Dupire Local Volatility Model The Dupire Local Volatility (LV) model was added. The Dupire local volatility surface can now be formed from an implied volatility surface using the function ExtendModelWithDupireLocalVolatilityCurve. This surface can then be used in F3 s generic Monte Carlo engine to simulate local volatility dynamics, and to calculate the value and sensitivities of options whose underlying asset prices follow those dynamics. The new functionality related to the Local Volatility Model is also demonstrated in the workbook "Local Stochastic Volatility", found under F3 > Quant Workbooks > FX in the F3 Excel Edition ribbon. FX Volatility Market Data Framework Enhancements The capability to calibrate an FX volatility surface to more than three option strategies per option expiry was added. This could be used, for example, to construct a volatility surface from ATM straddles and 25-Delta and 10- Delta risk reversals and butterflies. The function AddCalibratedQuadraticVolatilitySurfaceToModel has been enhanced to support the new functionality. In addition, smile and market risk reversals are now supported; the FX pricing engine now distinguishes smile and market butterflies; and the strategy or par strategy value can be returned through the Value and OptionStrategyParValue requests to the ValueProduct function. F3 Excel Edition Release Notes FinancialCAD Corporation Page 1

6 These enhancements are demonstrated in the workbook "FX Volatility Surface", found under F3 > Quant Workbooks > FX in the F3 Excel Edition ribbon. This workbook illustrates how to build an FX volatility surface using ATM straddles, risk reversals, and butterflies. Barrier Options The construction of barrier options has been streamlined by the introduction of the new functions CreateSingleBarrierEuropeanOption and CreateDoubleBarrierEuropeanOption. Furthermore, the valuation of partially observed barrier options (those with a barrier observation period that began in the past) now takes into account the values of the known historical fixings. For the valuation of discretely monitored barrier options, an efficient algorithm based on F3 s backward evolution framework (that is, backward induction using Fourier space time-stepping) has been added. This approach is applicable for all stochastic models for which a characteristic function is available and supported, and achieves significant speed improvements over Monte Carlo simulation under comparable numerical accuracy objectives and hardware settings. The algorithm can be enabled by invoking CreateSingleAssetCirculantMatrixBackwardEvolutionValuationSpecification. This new functionality is demonstrated in the workbook "Barrier Options", found under F3 > Quant Workbooks > FX in the F3 Excel Edition ribbon. This workbook shows how to price two different barrier options (an up-and-in and a double-knock-out) using a variety of models (Black, double exponential jump diffusion, and local stochastic volatility) and methods (Monte Carlo and backwards evolution). Inflation Curve Building Enhancements Functionality to handle quarterly inflation was added, since inflation indices are published in some countries on a quarterly basis rather than monthly. The additions include: The date modifiers QuarterStart and QuarterEnd to move a date to the beginning or the end of a quarter respectively, and the corresponding index referencers QuarterStartEndDate and QuarterEndEndDate. The capability to specify quarterly fixings via CreateQuarterlyIndexFixingsMarketData and CreateQuarterlyFixingsMarketData. The ability to specify quarterly seasonality adjustments with ExtendModelWithQuarterlyInflationSeasonalityCurve. A date modifier that adjusts a date by a number of quarters, which can be created with the new function CreateMoveQuartersDateModifier. This new functionality is demonstrated in the workbook "Quarterly Inflation Swap", found under F3 > Quant Workbooks > Fixed Income in the F3 Excel Edition ribbon. This workbook creates a quarterly inflation index, builds the implied inflation curve from market data, and prices a zero-coupon inflation swap that references the inflation index with a separate lag from the market swaps. The creation of lagged indices was simplified with the new convenience functions CreateMonthlyLaggedIndex and CreateQuarterlyLaggedIndex. The use of the new function CreateMonthlyLaggedIndex is demonstrated on the ReferenceData sheets of the workbooks "Inflation Swap" and "Inflation Bond", found under F3 > Quant Workbooks > Fixed Income in the F3 Excel Edition ribbon. F3 Excel Edition Release Notes FinancialCAD Corporation Page 2

7 In order to allow a user to specify seasonality adjustments more flexibly, the seasonality curve is now stored as a one-dimensional curve as a function of the seasonality period. For backward compatibility, any user-specified zero-dimensional seasonality curve is converted during valuation. The cyclical day count conventions CyclicalMonths and CyclicalQuarters were introduced to be used with the seasonality curve. By use of the function CreateInflationTimeCalculatorValuationSpecification, the user can now specify the time calculator (day count convention) for calculating forward inflation. This is useful in particular for the valuation of inflation-linked bonds based on an assumed inflation rate that accrues with the WholeMonths day count convention. LIBOR-in-Arrears and CMS-in-Advance The ability to automatically detect the need for timing convexity adjustment, and insert the appropriate correction factor to the payoff function for single-variable rate products, was added. The main applications are LIBOR-in-Arrears and CMS-in-Advance. The correction factor is the Radon-Nikodym derivative, resulting from the measure change between the forward measures associated with the natural and actual payment times of the payment index. In the current implementation, a simple compounding rule based on the underlying rate index is used to approximate the correction factor. The final payoff is evaluated using replication by swaptions in a model-independent fashion. This functionality is demonstrated in the workbook "CMS and Libor in Arrears", found under F3 > Example Workbooks > Valuation Examples > Rates in the F3 Excel Edition ribbon. This workbook demonstrates the valuation of Constant Maturity Swaps (CMS), CMS caps/floors, as well as timing-adjusted versions of CMS set inadvance and Libor set in-arrears. Normal Model for Swaptions and Caps/Floors The normal model for the pricing of interest rate swaptions and caps/floors is now supported. For this purpose, the volatility convention input for the functions ExtendModelWithStrippedCapVolatilitySurface and ExtendModelWithInterpolatedVolatilityCube were extended to allow normal as an input. The function ExtendModelWithBlackVolatilityCube, which uses these two functions to build the caplet surface and swaption volatility cube, was also enhanced for handling normal quotes. Brazilian CDI Curve Support for building Brazilian CDI curves was added, including the explicit ability to value DI futures and CDI swaps. These instruments reference the exponentially compounded CDI rate. Several new functions, including CreateExponentialCompoundingRateIndex, CreateExponentialAccrualIndex and ExtendModelWithExponentialImpliedRateCurve, were added to handle this type of compounding. To facilitate the setup for curve building, various prebuilt Brazilian market conventions objects and instrument types were added, along with the functions CreateExponentialAccrualFuturesContractType and CreateExponentialAccrualZeroCouponSwapInstrumentType. This new functionality is demonstrated in the workbook "Brazilian Rate Curves", found under F3 > Quant Workbooks > Fixed Income in the F3 Excel Edition ribbon. This workbook demonstrates how to set up and build a Brazilian interest rate curve from DI futures, and how to calculate the value and sensitivities of Pre-DI swaps. F3 Excel Edition Release Notes FinancialCAD Corporation Page 3

8 Cash-Settled Swaptions Added support for cash-settled swaptions which use the par-yield curve settlement method. This settlement method uses the swap rate as the discount rate to calculate the present value of an annuity, and is the standard settlement method for swaptions in European markets. The functions CreateParYieldCashSettledSwaption and CreateCommonStrikeParYieldCashSettledSwaptionMarketData were added for the creation of the product and market data objects. Two valuation methods are supported for cash-settled swaptions. If the valuation specification indicates that convexity should be ignored, the value of a swaption is computed using a Black-like market formula. Alternatively, if the valuation method specifies that convexity should be taken into account, a cash-settled swaption will be valued through payoff replication. This new functionality is demonstrated in the workbook "Swaption Vol Cube Construction with SABR Model", found under F3 > Quant Workbooks > Rates in the F3 Excel Edition ribbon. This workbook shows how to build a swaption volatility cube and a caplet volatility surface by calibrating the SABR model to vanilla swaption, par yield cash-settled swaption, and cap market data. The volatility cube and surface are then used to price several types of interest rates derivatives, including par yield cash-settled swaptions. Parallel Processing for Monte Carlo, Value at Risk, and Potential Future Exposure Calculations Parallel processing has been improved for Monte Carlo simulations through F3 Platform s distribution capability, which is also available for ValueAtRisk and PotentialFutureExposure calculations. This new method allows parallel processes to scale better. To set up parallel processing, use the CreateF3PlatformGridConnection function, which allows calculations to be distributed across available Calculation Workers. This function requires access to F3 Platform. For guidance on performing this operation, contact FINCAD Client Services. Infrastructure There are no new features in the F3 Excel Edition infrastructure. 3. Bug Fixes This section describes selected bugs that were fixed in the F3 Excel Edition 4.3 release. Unless otherwise specified, users are not required to make changes to their application. Analytics The Analytics section includes bug fixes made in functions that existed prior to the release of F3 Excel Edition 4.3. Title Par Rate for Zero-Coupon Inflation Swaps Description The calculation engine for the valuation of zero-coupon swaps was updated so that the ValueProduct requests ParRate and ParRateRisk now return the correct zerocoupon par rates for zero-coupon swaps, including zerocoupon inflation swaps. F3 Excel Edition Release Notes FinancialCAD Corporation Page 4

9 Title Performance of Monte Carlo Risk Report Performance of Hull White Model Monte Carlo FX Volatility Framework Risk Description The performance of the Risk Report calculation for all Monte Carlo-based valuation was significantly improved by lowering memory consumption and increasing the calculation speed. In particular, these performance improvements benefit intensive valuations such as those of complex structured products, and the valuation of CVA and its Risk Report. The Monte Carlo engine for simulating affine yield models such as the Hull White model was optimized. The Risk Report contributions from FX strategies have been corrected. Infrastructure There are no bug fixes in the F3 Excel Edition infrastructure. 4. Mandatory Changes This section lists modifications which may require users to make changes to their application. This section includes all mandatory changes from F3 Excel Edition 4.1 until version 4.3. The version in which the modification was introduced is also specified. Analytics The Analytics section includes changes made to functions that existed prior to the release of F3 Excel Edition 4.3. Change Description Version Introduced AddInflationCurveToModel Function The function AddInflationCurveToModel has been deprecated, since it required a base inflation level without any reference date. Rather, the functions ExtendModelWithBootstrappedInterpolationCurve and ExtendModelWithPeriodicFixingsCurve should be used instead. The base index value is now taken automatically from the fixings table. See section on Inflation Curve Building Enhancements, under New Features, above. 4.2 F3 Excel Edition Release Notes FinancialCAD Corporation Page 5

10 Change Description Version Introduced CreateBermudanOption Function CreateBermudanSwaption Function AddAllRepositoryMarketDataToModel Function The manner in which exercise opportunities and settlement delay are specified in CreateBermudanOption has been changed to be more intuitive and flexible. Exercise dates can now be defined as either a list of dates or a date list builder with a roll schedule. The arguments ExerciseStartDate, ExerciseEnd, and ExerciseMarketConvention were removed, and have been replaced by ExerciseTimePoints and SettlementConvention. The manner in which exercise opportunities are specified in CreateBermudanSwaption has been changed to be more intuitive and flexible. Exercise dates can now be defined as either a list of dates or a date list builder with a roll schedule. The arguments ExerciseStartDate, ExerciseEnd, and ExerciseMarketConvention were removed, and have been replaced by ExerciseTimePoints. The function AddAllRepositoryMarketDataToModel has been deprecated. The same functionality can be achieved by using ListMembers and ExtendModelWithMarketData Infrastructure There are no changes in the F3 Excel Edition infrastructure. F3 Excel Edition Release Notes FinancialCAD Corporation Page 6

11 5. Known Issues The following section lists known issues since F3 Excel Edition 4.0. Where appropriate, a workaround is provided. The version in which the issue arose is also specified. Analytics The Analytics section includes known issues in the F3 core library since F3 Excel Edition 4.0. Title Description Version CMS and Libor in Arrears Workbook Requires Manual Recalculation USDGBP Vol Surface in Example Workbooks Not all components of the workbook CMS and Libor in Arrears (located under F3 > Example Workbooks > Valuation Examples > Rates in the ribbon) are refreshed when the workbook is recalculated (for example, by pressing F9 in manual calculation mode). This results in error messages on the Value and Risk sheets. This is because the function calls on the Val Spec sheet are not being executed automatically by Microsoft Excel, since the cells that contain them are not volatile. In order to force them to be updated, it is necessary to perform the following steps for each of the three yellow cells on that sheet: (1) select the cell; (2) press F2; (3) press Enter. When this worksheet has been refreshed in this manner, the remainder of the workbook can be manually recalculated by pressing F9 as usual. A corrected version of this workbook, in which all of the components are refreshed automatically, is available as F3_EE_4_3_ CMSAndLiborInArrears_WorkbookPatch from the Files section on FINCAD s online Support Center. Calls to the ValueProduct function in Example Workbooks that require a calibrated FX volatility surface for the USDGBP currency pair may return the following error: #Error: Error during numerical search routine as unable to converge.... An example of this is in the workbook Euro FX Option, found under F3 > Example Workbooks > Valuation Examples > FX in the F3 Excel Edition ribbon, in which a European call option on USDGBP is analyzed (see cells F8:F22 of the Value sheet). This error is due to an inability to calibrate a quadratic volatility surface for that particular currency pair. This stems from a poor choice of initial guesses for the quadratic coefficients, combined with a specification to hold the skewness at an inappropriate fixed value. These choices are made in the Modeling workbook, found under F3 > Example Workbooks > Market Data and Model Setup in the F3 Excel Edition ribbon (see cells G14 and G19 of the FXVol sheet). This setup is reflected in the corresponding Modeling.func file that is used by the Euro FX Option workbook; the file is loaded via a call to ImportObjects on the LoadModel sheet. A new version of the Modeling workbook, with more appropriate parameters for the USDGBP vol surface calibration, is available as F3_EE_4_3_USDGBP_USDCHFVolSurfaces_WorkbookPatch from the Files section on FINCAD s online Support Center. The corresponding Modeling.func file is also available there; this file must be copied to the local drive in order for the Euro FX Option workbook to use it F3 Excel Edition Release Notes FinancialCAD Corporation Page 7

12 Title Description Version Minor issues with Quarterly Inflation Swap workbook Typographical Error in F3 Reference Manual In the workbook Quarterly Inflation Swap, found under F3 > Quant Workbooks > Fixed Income in the F3 Excel Edition ribbon, the first two values of the lagged inflation curve cannot be calculated if the valuation date is within about 40 days of the start of the quarter. This problem expresses itself as the message #Error: Model-curve error for curve tag: AUD:RPI:Fixings - Curve does not contain fixing for specified date: yyyy-mmdd! which appears in cells N7:N8 of the RPICurve sheet. These errors can be eliminated by adding an earlier fixing in cells I16:J16 of the MarketData sheet. In addition, the function (1+x), rather than the exponential function exp(x), is being used to convert the seasonality adjustment parameters to multiplicative factors in the Seasonality sheet. A new version of the Quarterly Inflation Swap workbook, containing additional fixings and using the exponential function for seasonality adjustments, is available as F3_EE_4_3_QuarterlyInflation_WorkbookPatch from the Files section on FINCAD s online Support Center. There is a typographical error in the documentation of the CreateHullWhiteWithConstantMeanReversionAndVolatilityModifier function in the F3 Reference Manual. In Eq. (5.17), the correct equation for is: Deliverable IR Swap Futures: Configuration Recommendations LinearTotalVariance Interpolation Method To better match DSF valuation in F3 with CME market quotes, we suggest the use of the market conventions and collateralization as demonstrated in the updated workbook found under F3 > Example Workbooks > Valuation Examples > Rates > Interest Rate Swap Futures. In addition, do not apply convexity adjustment, and obtain the required OIS-based, collateralized discount curve via the Vanilla Rates prebuilt model. The LinearTotalVariance interpolation method uses total variance to interpolate and extrapolate. In some cases the generation of Monte Carlo paths fails because the serial correlations at the extrapolated maturities are one. Workaround: The user should force constant extrapolation by providing two additional quotes in the volatility market data: Quotes: One with a maturity of 1d and the same volatility as the first-quoted volatility One with a very large maturity (larger than the last relevant date in the valuation) and the same volatility as the last-quoted volatility The workaround gives serial correlations that are always less than one. It means that interpolation is performed in total variance, but the volatility extrapolation is constant F3 Excel Edition Release Notes FinancialCAD Corporation Page 8

13 Infrastructure This section includes known issues in the F3 Excel Edition infrastructure. Title Description Version IE11 Security Feature Blocks F3 Workstation F3 Blotter Error Messages The Enhanced Protected Mode feature of Internet Explorer 11 blocks F3 Workstation. Workarounds: Disable Enhanced Protected Mode see Add the IP address to the list of Trusted sites see Use Mozilla Firefox or Google Chrome. Under some circumstances, when a user attempts to view errors reported in F3 Workstation's Blotter output data columns, the error messages may come up empty F3 Excel Edition Release Notes FinancialCAD Corporation Page 9