Class StructuredNotes

java.lang.Object
com.quantfinlib.pricing.StructuredNotes
public final class StructuredNotes extends Object
STRUCTURED NOTES — the retail shelf, priced the only honest way: by DECOMPOSITION into the vanilla pieces this library already prices. Every structured product is a bond plus options in a costume; the costume is what the issuer charges for. Pricing by replication makes the margin visible, and the tests ARE the decompositions (each note must equal its replicating portfolio to machine precision).
  • Reverse convertible — par bond + fat coupon, but the investor has SOLD a put struck at K: if S_T < K they receive shares worth S_T/K of par instead of par. value = (par + coupon) * DF(T) - (par/K) * put(K). The "9% coupon" is put premium in disguise — the whole product in one sentence. (The knock-in variant needs a down-and-in put, which this library does not yet price closed-form — stated, not approximated.)
  • Capital-protected note — protection * par floor plus participation of the upside: value = protection * par * DF(T) + participation * (par/S0) * call(S0). The issuer's real product decision is the PARTICIPATION RATE the budget affords: participationFor(double, double, double, double, double, double, double, double) inverts the pricing for it — low rates or high vol mean thin participation, which is why these notes flourish when rates are high and die when they are zero.
  • Discount certificate — buy the underlying at a discount, give away the upside beyond a cap: the covered call, value = S * e^{-qT} - call(cap). The discount to spot is exactly the call premium received.

Deltas come from the same decompositions (sum of the pieces' BlackScholes.delta(com.quantfinlib.pricing.BlackScholes.OptionType, double, double, double, double, double, double) terms), so hedging a note is hedging its replication — which is literally what the issuer's desk does. Values are per note of face par (certificate: per unit of underlying). Issuer margin = issue price minus fair value; this class computes fair value and leaves the margin arithmetic in plain sight. Research lane, deterministic.

  • Method Summary

    Modifier and Type
    Method
    Description
    static double
    capitalProtectedNote(double par, double protection, double participation, double spot, double rate, double carry, double vol, double timeYears)
    Fair value of a capital-protected note: protection of par floored, plus participation of the underlying's upside from spot.
    static double
    discountCertificate(double spot, double cap, double rate, double carry, double vol, double timeYears)
    Fair value per unit of underlying of a discount certificate capped at cap: the covered call S e^{-qT} - call(cap).
    static double
    discountCertificateDelta(double spot, double cap, double rate, double carry, double vol, double timeYears)
    Delta of the discount certificate: long stock, short call.
    static double
    participationFor(double par, double protection, double issuePrice, double spot, double rate, double carry, double vol, double timeYears)
    The participation rate a given ISSUE PRICE affords: (issuePrice - protection * par * DF) / ((par/S0) * call).
    static double
    reverseConvertible(double par, double couponRate, double spot, double strike, double rate, double carry, double vol, double timeYears)
    Fair value of a vanilla reverse convertible of face par.
    static double
    reverseConvertibleDelta(double par, double spot, double strike, double rate, double carry, double vol, double timeYears)
    Delta of the reverse convertible: short put makes the holder LONG the stock.

    Methods inherited from class java.lang.Object

    clone, equals, finalize, getClass, hashCode, notify, notifyAll, toString, wait, wait, wait

  • Method Details

    • reverseConvertible

      public static double reverseConvertible(double par, double couponRate, double spot, double strike, double rate, double carry, double vol, double timeYears)
      Fair value of a vanilla reverse convertible of face par.
      Parameters:
      couponRate - total coupon rate for the LIFE of the note (0.09 = 9% paid at maturity with the redemption)
      strike - the conversion strike K (shares delivered are worth S_T/K * par when S_T < K)

    • reverseConvertibleDelta

      public static double reverseConvertibleDelta(double par, double spot, double strike, double rate, double carry, double vol, double timeYears)
      Delta of the reverse convertible: short put makes the holder LONG the stock.

    • capitalProtectedNote

      public static double capitalProtectedNote(double par, double protection, double participation, double spot, double rate, double carry, double vol, double timeYears)
      Fair value of a capital-protected note: protection of par floored, plus participation of the underlying's upside from spot.

    • participationFor

      public static double participationFor(double par, double protection, double issuePrice, double spot, double rate, double carry, double vol, double timeYears)
      The participation rate a given ISSUE PRICE affords: (issuePrice - protection * par * DF) / ((par/S0) * call). This is the issuer's product-design equation solved for its one free variable — and the reason zero-rate eras produce notes with embarrassing participation: the bond floor eats the whole budget.

    • discountCertificate

      public static double discountCertificate(double spot, double cap, double rate, double carry, double vol, double timeYears)
      Fair value per unit of underlying of a discount certificate capped at cap: the covered call S e^{-qT} - call(cap).

    • discountCertificateDelta

      public static double discountCertificateDelta(double spot, double cap, double rate, double carry, double vol, double timeYears)
      Delta of the discount certificate: long stock, short call.