Last updated: 2023-03-16.
tf_quant_finance.rates.swap_curve_bootstrap#
Constructs the zero swap curve using bootstrap method.
tf_quant_finance.rates.swap_curve_bootstrap(
float_leg_start_times, float_leg_end_times, fixed_leg_start_times,
fixed_leg_end_times, fixed_leg_cashflows, present_values,
present_values_settlement_times=None, float_leg_daycount_fractions=None,
fixed_leg_daycount_fractions=None, float_leg_discount_rates=None,
float_leg_discount_times=None, fixed_leg_discount_rates=None,
fixed_leg_discount_times=None, curve_interpolator=None,
initial_curve_rates=None, curve_tolerance=1e-08, maximum_iterations=50,
dtype=None, name=None
)
A zero swap curve is a function of time which gives the interest rate that
can be used to project forward rates at arbitrary t for the valuation of
interest rate securities (e.g. FRAs, Interest rate futures, Swaps etc.).
Suppose we have a set of N Interest Rate Swaps (IRS) S_i with increasing
expiries whose market prices are known.
Suppose also that the ith IRS issues cashflows at times T_{ij} where
1 <= j <= n_i and n_i is the number of cashflows (including expiry)
for the ith swap.
Denote by T_i the time of final payment for the ith swap
(hence T_i = T_{i,n_i}). This function estimates a set of rates r(T_i)
such that when these rates are interpolated (using the user specified
interpolation method) to all other cashflow times, the computed value of the
swaps matches the market value of the swaps (within some tolerance).
The algorithm implemented here uses the bootstrap method to iteratively construct the swap curve [1].
Example:#
The following example illustrates the usage by building an implied swap curve from four vanilla (fixed to float) LIBOR swaps.
dtype = np.float64
# Next we will set up LIBOR reset and payment times for four spot starting
# swaps with maturities 1Y, 2Y, 3Y, 4Y. The LIBOR rate spans 6M.
float_leg_start_times = [
np.array([0., 0.5], dtype=dtype),
np.array([0., 0.5, 1., 1.5], dtype=dtype),
np.array([0., 0.5, 1.0, 1.5, 2.0, 2.5], dtype=dtype),
np.array([0., 0.5, 1.0, 1.5, 2.0, 2.5, 3.0, 3.5], dtype=dtype)
]
float_leg_end_times = [
np.array([0.5, 1.0], dtype=dtype),
np.array([0.5, 1., 1.5, 2.0], dtype=dtype),
np.array([0.5, 1.0, 1.5, 2.0, 2.5, 3.0], dtype=dtype),
np.array([0.5, 1.0, 1.5, 2.0, 2.5, 3.0, 3.5, 4.0], dtype=dtype)
]
# Next we will set up start and end times for semi-annual fixed coupons.
fixed_leg_start_times = [
np.array([0., 0.5], dtype=dtype),
np.array([0., 0.5, 1., 1.5], dtype=dtype),
np.array([0., 0.5, 1.0, 1.5, 2.0, 2.5], dtype=dtype),
np.array([0., 0.5, 1.0, 1.5, 2.0, 2.5, 3.0, 3.5], dtype=dtype)
]
fixed_leg_end_times = [
np.array([0.5, 1.0], dtype=dtype),
np.array([0.5, 1., 1.5, 2.0], dtype=dtype),
np.array([0.5, 1.0, 1.5, 2.0, 2.5, 3.0], dtype=dtype),
np.array([0.5, 1.0, 1.5, 2.0, 2.5, 3.0, 3.5, 4.0], dtype=dtype)
]
# Next setup a trivial daycount for floating and fixed legs.
float_leg_daycount = [
np.array([0.5, 0.5], dtype=dtype),
np.array([0.5, 0.5, 0.5, 0.5], dtype=dtype),
np.array([0.5, 0.5, 0.5, 0.5, 0.5, 0.5], dtype=dtype),
np.array([0.5, 0.5, 0.5, 0.5, 0.5, 0.5, 0.5, 0.5], dtype=dtype)
]
fixed_leg_daycount = [
np.array([0.5, 0.5], dtype=dtype),
np.array([0.5, 0.5, 0.5, 0.5], dtype=dtype),
np.array([0.5, 0.5, 0.5, 0.5, 0.5, 0.5], dtype=dtype),
np.array([0.5, 0.5, 0.5, 0.5, 0.5, 0.5, 0.5, 0.5], dtype=dtype)
]
fixed_leg_cashflows = [
# 1 year swap with 2.855% semi-annual fixed payments.
np.array([-0.02855, -0.02855], dtype=dtype),
# 2 year swap with 3.097% semi-annual fixed payments.
np.array([-0.03097, -0.03097, -0.03097, -0.03097], dtype=dtype),
# 3 year swap with 3.1% semi-annual fixed payments.
np.array([-0.031, -0.031, -0.031, -0.031, -0.031, -0.031], dtype=dtype),
# 4 year swap with 3.2% semi-annual fixed payments.
np.array([-0.032, -0.032, -0.032, -0.032, -0.032, -0.032, -0.032,
-0.032], dtype=dtype)
]
# The present values of the above IRS.
pvs = np.array([0., 0., 0., 0.], dtype=dtype)
# Initial state of the curve.
initial_curve_rates = np.array([0.01, 0.01, 0.01, 0.01], dtype=dtype)
results = swap_curve_bootstrap(float_leg_start_times, float_leg_end_times,
float_leg_daycount, fixed_leg_start_times,
fixed_leg_end_times, fixed_leg_cashflows,
fixed_leg_daycount, pvs, dtype=dtype,
initial_curve_rates=initial_curve_rates)
#### References:
[1]: Patrick Hagan & Graeme West. Interpolation Methods for Curve
Construction. Applied Mathematical Finance. Vol 13, No. 2, pp 89-129.
June 2006.
https://www.researchgate.net/publication/24071726_Interpolation_Methods_for_Curve_Construction
#### Args:
* <b>`float_leg_start_times`</b>: List of `Tensor`s. Each `Tensor` must be of rank 1
and of the same real dtype. They may be of different sizes. Each `Tensor`
represents the beginning of the accrual period for the forward rate which
determines the floating payment. Each element in the list belong to a
unique swap to be used to build the curve.
* <b>`float_leg_end_times`</b>: List of `Tensor`s. Each `Tensor` must be of rank 1 and
and the same shape and of the same real dtype as the corresponding element
in `float_leg_start_times`. Each `Tensor` represents the end of the
accrual period for the forward rate which determines the floating payment.
* <b>`fixed_leg_start_times`</b>: List of `Tensor`s. Each `Tensor` must be of rank 1
and of the same real dtype. They may be of different sizes. Each `Tensor`
represents the beginning of the accrual period fixed coupon.
* <b>`fixed_leg_end_times`</b>: List of `Tensor`s. Each `Tensor` must be of the same
shape and type as `fixed_leg_start_times`. Each `Tensor` represents the
end of the accrual period for the fixed coupon.
* <b>`fixed_leg_cashflows`</b>: List of `Tensor`s. The list must be of the same length
as the `fixed_leg_start_times`. Each `Tensor` must be of rank 1 and of the
same dtype as the `Tensor`s in `fixed_leg_start_times`. The input contains
fixed cashflows at each coupon payment time including notional (if any).
The sign should be negative (positive) to indicate net outgoing (incoming)
cashflow.
* <b>`present_values`</b>: List containing scalar `Tensor`s of the same dtype as
elements of `fixed_leg_cashflows`. The length of the list must be the same
as the length of `fixed_leg_cashflows`. The input contains the market
price of the underlying instruments.
* <b>`present_values_settlement_times`</b>: List containing scalar `Tensor`s of the
same dtype as elements of `present_values`. The length of the list must be
the same as the length of `present_values`. The settlement times for the
present values is the time from now when the instrument is traded to the
time that the purchase price is actually delivered. If not supplied, then
it is assumed that the settlement times are zero for every bond.
Default value: `None`, which is equivalent to zero settlement times.
* <b>`float_leg_daycount_fractions`</b>: Optional list of `Tensor`s. Each `Tensor` must
be of the same shape and type as `float_leg_start_times`. They may be of
different sizes. Each `Tensor` represents the daycount fraction of the
forward rate which determines the floating payment.
Default value: `None`, If omitted the daycount fractions are computed as
the difference between float_leg_end_times and float_leg_start_times.
* <b>`fixed_leg_daycount_fractions`</b>: Optional list of `Tensor`s. Each `Tensor` must
be of the same shape and type as `fixed_leg_start_times`. Each `Tensor`
represents the daycount fraction applicable for the fixed payment.
Default value: `None`, If omitted the daycount fractions are computed as
the difference between fixed_leg_end_times and fixed_leg_start_times.
* <b>`float_leg_discount_rates`</b>: Optional `Tensor` of the same dtype as
`initial_discount_rates`. This input contains the continuously compounded
discount rates the will be used to discount the floating cashflows. This
allows the swap curve to constructed using an independent discount curve
(e.g. OIS curve).
Default value: `None`, in which case the cashflows are discounted using
the curve that is being constructed.
* <b>`float_leg_discount_times`</b>: Optional `Tensor` of the same dtype and shape as
`float_leg_discount_rates`. This input contains the times corresponding to
the rates specified via the `float_leg_discount_rates`.
* <b>`fixed_leg_discount_rates`</b>: Optional `Tensor` of the same dtype as
`initial_discount_rates`. This input contains the continuously compounded
discount rates the will be used to discount the fixed cashflows. This
allows the swap curve to constructed using an independent discount curve
(e.g. OIS curve).
Default value: `None`, in which case the cashflows are discounted using
the curve that is being constructed.
* <b>`fixed_leg_discount_times`</b>: Optional `Tensor` of the same dtype and shape as
`fixed_leg_discount_rates`. This input contains the times corresponding to
the rates specified via the `fixed_leg_discount_rates`.
* <b>`curve_interpolator`</b>: Optional Python callable used to interpolate the zero
swap rates at cashflow times. It should have the following interface:
yi = curve_interpolator(xi, x, y)
`x`, `y`, 'xi', 'yi' are all `Tensors` of real dtype. `x` and `y` are the
sample points and values (respectively) of the function to be
interpolated. `xi` are the points at which the interpolation is
desired and `yi` are the corresponding interpolated values returned by the
function.
Default value: `None`, which maps to linear interpolation.
* <b>`initial_curve_rates`</b>: Optional `Tensor` of the same dtype and shape as
`present_values`. The starting guess for the discount rates used to
initialize the iterative procedure.
Default value: `None`. If not supplied, the yields to maturity for the
bonds is used as the initial value.
* <b>`curve_tolerance`</b>: Optional positive scalar `Tensor` of same dtype as
elements of `bond_cashflows`. The absolute tolerance for terminating the
iterations used to fit the rate curve. The iterations are stopped when the
estimated discounts at the expiry times of the bond_cashflows change by a
amount smaller than `discount_tolerance` in an iteration.
Default value: 1e-8.
* <b>`maximum_iterations`</b>: Optional positive integer `Tensor`. The maximum number
of iterations permitted when fitting the curve.
Default value: 50.
* <b>`dtype`</b>: `tf.Dtype`. If supplied the dtype for the (elements of)
`float_leg_start_times`, and `fixed_leg_start_times`.
Default value: None which maps to the default dtype inferred by
TensorFlow.
* <b>`name`</b>: Python str. The name to give to the ops created by this function.
Default value: `None` which maps to 'swap_curve'.
#### Returns:
* <b>`curve_builder_result`</b>: An instance of `SwapCurveBuilderResult` containing the
following attributes.
times: Rank 1 real `Tensor`. Times for the computed rates. These
are chosen to be the expiry times of the supplied instruments.
rates: Rank 1 `Tensor` of the same dtype as `times`.
The inferred zero rates.
discount_factor: Rank 1 `Tensor` of the same dtype as `times`.
The inferred discount factors.
initial_rates: Rank 1 `Tensor` of the same dtype as `times`. The
initial guess for the rates.
converged: Scalar boolean `Tensor`. Whether the procedure converged.
The procedure is said to have converged when the maximum absolute
difference in the discount factors from one iteration to the next falls
below the `discount_tolerance`.
failed: Scalar boolean `Tensor`. Whether the procedure failed. Procedure
may fail either because a NaN value was encountered for the discount
rates or the discount factors.
iterations: Scalar int32 `Tensor`. Number of iterations performed.
#### Raises:
* <b>`ValueError`</b>: If the initial state of the curve is not
supplied to the function.