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/**
* Copyright (c) 2016-2022 Deephaven Data Labs and Patent Pending
*/
package io.deephaven.numerics.derivatives;
import org.apache.commons.math3.distribution.NormalDistribution;
import static io.deephaven.util.QueryConstants.NULL_DOUBLE;
/**
* A generalized Black-Scholes model for European options.
*/
public class BlackScholes {
private BlackScholes() {}
private static final double EPS = 1e-8;
private static final int MAX_ITERS = 10000;
/**
* Computes the generalized Black-Scholes option price.
*
* @param isCall true for call; false for put.
* @param S underlying stock price
* @param X strike price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @param v volatility
* @return theoretical option price
*/
public static double price(final boolean isCall, final double S, final double X, final double T, final double r,
final double b, final double v) {
final double d1 = (Math.log(S / X) + (b + v * v / 2) * T) / (v * Math.sqrt(T));
final double d2 = d1 - v * Math.sqrt(T);
if (isCall) {
return S * Math.exp((b - r) * T) * CND(d1) - X * Math.exp(-r * T) * CND(d2);
} else {
return X * Math.exp(-r * T) * CND(-d2) - S * Math.exp((b - r) * T) * CND(-d1);
}
}
/**
* Computes the generalized Black-Scholes delta (first order partial derivative of option price with respect to
* stock price).
*
* @param isCall true for call; false for put.
* @param S underlying stock price
* @param X strike price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @param v volatility
* @return theoretical option delta
*/
public static double delta(final boolean isCall, final double S, final double X, final double T, final double r,
final double b, final double v) {
final double d1 = (Math.log(S / X) + (b + v * v / 2) * T) / (v * Math.sqrt(T));
if (isCall) {
return Math.exp((b - r) * T) * CND(d1);
} else {
return Math.exp((b - r) * T) * (CND(d1) - 1);
}
}
/**
* Computes the generalized Black-Scholes gamma (second order partial derivative of option price with respect to
* stock price).
*
* @param S underlying stock price
* @param X strike price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @param v volatility
* @return theoretical option price
*/
public static double gamma(final double S, final double X, final double T, final double r, final double b,
final double v) {
final double d1 = (Math.log(S / X) + (b + v * v / 2) * T) / (v * Math.sqrt(T));
return nd.density(d1) * Math.exp((b - r) * T) / (S * v * Math.sqrt(T));
}
/**
* Computes the generalized Black-Scholes percentage gamma (first order partial derivative of delta with respect to
* ln(stock price)).
*
* @param S underlying stock price
* @param X strike price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @param v volatility
* @return theoretical option price
*/
public static double gammaP(final double S, final double X, final double T, final double r, final double b,
final double v) {
return gamma(S, X, T, r, b, v) * S;
}
/**
* Computes the generalized Black-Scholes vega (first order partial derivative of option price with respect to
* volatility).
*
* @param S underlying stock price
* @param X strike price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @param v volatility
* @return theoretical option price
*/
public static double vega(final double S, final double X, final double T, final double r, final double b,
final double v) {
final double d1 = (Math.log(S / X) + (b + v * v / 2) * T) / (v * Math.sqrt(T));
return S * Math.exp((b - r) * T) * nd.density(d1) * Math.sqrt(T);
}
/**
* Computes the generalized Black-Scholes percentage vega (first order partial derivative of vega with respect to
* ln(volatility)).
*
* @param S underlying stock price
* @param X strike price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @param v volatility
* @return theoretical option price
*/
public static double vegaP(final double S, final double X, final double T, final double r, final double b,
final double v) {
return v * vega(S, X, T, r, b, v);
}
/**
* Computes the generalized Black-Scholes vomma (second order partial derivative of option price with respect to
* volatility).
*
* @param S underlying stock price
* @param X strike price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @param v volatility
* @return theoretical option price
*/
public static double vomma(final double S, final double X, final double T, final double r, final double b,
final double v) {
final double d1 = (Math.log(S / X) + (b + v * v / 2) * T) / (v * Math.sqrt(T));
final double d2 = d1 - (v * Math.sqrt(T));
return vega(S, X, T, r, b, v) * d1 * d2 / v;
}
/**
* Computes the generalized Black-Scholes percentage vomma (first order partial derivative of Vega with respect to
* ln(volatility)).
*
* @param S underlying stock price
* @param X strike price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @param v volatility
* @return theoretical option price
*/
public static double vommaP(final double S, final double X, final double T, final double r, final double b,
final double v) {
final double d1 = (Math.log(S / X) + (b + v * v / 2) * T) / (v * Math.sqrt(T));
final double d2 = d1 - (v * Math.sqrt(T));
return vegaP(S, X, T, r, b, v) * d1 * d2 / v;
}
/**
* Computes the generalized Black-Scholes vegaBleed (first order partial derivative of Vega with respect to time to
* expiry).
*
* @param S underlying stock price
* @param X strike price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @param v volatility
* @return theoretical option price
*/
public static double vegaBleed(final double S, final double X, final double T, final double r, final double b,
final double v) {
final double d1 = (Math.log(S / X) + (b + v * v / 2) * T) / (v * Math.sqrt(T));
final double d2 = d1 - (v * Math.sqrt(T));
return vega(S, X, T, r, b, v) * (r - b + (b * d1 / (v * Math.sqrt(T))) - (1 + d1 * d2) / (2 * T));
}
/**
* Computes the generalized Black-Scholes charm (first order partial derivative of Delta with respect to time to
* expiry).
*
* @param isCall true for call; false for put.
* @param S underlying stock price
* @param X strike price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @param v volatility
* @return theoretical option price
*/
public static double charm(final boolean isCall, final double S, final double X, final double T, final double r,
final double b, final double v) {
final double d1 = (Math.log(S / X) + (b + v * v / 2) * T) / (v * Math.sqrt(T));
final double d2 = d1 - (v * Math.sqrt(T));
if (isCall) {
return -Math.exp((b - r) * T)
* ((nd.density(d1) * (b / (v * Math.sqrt(T)) - d2 / (2 * T))) + (b - r) * CND(d1));
} else {
return -Math.exp((b - r) * T)
* ((nd.density(d1) * (b / (v * Math.sqrt(T)) - d2 / (2 * T))) - (b - r) * CND(-d1));
}
}
/**
* Computes the generalized Black-Scholes theta (first order partial derivative of option price with respect to time
* to expiry).
*
* @param isCall true for call; false for put.
* @param S underlying stock price
* @param X strike price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @param v volatility
* @return theoretical option price
*/
public static double theta(final boolean isCall, final double S, final double X, final double T, final double r,
final double b, final double v) {
final double d1 = (Math.log(S / X) + (b + v * v / 2) * T) / (v * Math.sqrt(T));
final double d2 = d1 - (v * Math.sqrt(T));
if (isCall) {
return ((-S * Math.exp((b - r) * T) * nd.density(d1) * v) / (2 * Math.sqrt(T)))
- ((b - r) * S * Math.exp((b - r) * T) * CND(d1)) - (r * X * Math.exp(-r * T) * CND(d2));
} else {
return ((-S * Math.exp((b - r) * T) * nd.density(d1) * v) / (2 * Math.sqrt(T)))
+ ((b - r) * S * Math.exp((b - r) * T) * CND(-d1)) + (r * X * Math.exp(-r * T) * CND(-d2));
}
}
/**
* Computes the generalized Black-Scholes driftlessTheta (theta assuing the risk free rate and the cost of carry are
* zero).
*
* @param S underlying stock price
* @param X strike price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @param v volatility
* @return theoretical option price
*/
public static double driftlessTheta(final double S, final double X, final double T, final double r, final double b,
final double v) {
final double d1 = (Math.log(S / X) + (b + v * v / 2) * T) / (v * Math.sqrt(T));
return -S * nd.density(d1) * v / (2 * Math.sqrt(T));
}
/**
* Computes the generalized Black-Scholes rho (first order partial derivative of option price with respect to
* risk-free rate).
*
* @param isCall true for call; false for put.
* @param S underlying stock price
* @param X strike price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @param v volatility
* @return theoretical option price
*/
public static double rho(final boolean isCall, final double S, final double X, final double T, final double r,
final double b, final double v) {
final double d1 = (Math.log(S / X) + (b + v * v / 2) * T) / (v * Math.sqrt(T));
final double d2 = d1 - (v * Math.sqrt(T));
if (isCall) {
return T * X * Math.exp(-r * T) * CND(d2);
} else {
return -T * X * Math.exp(-r * T) * CND(-d2);
}
}
/**
* Computes the generalized Black-Scholes carryRho (first order partial derivative of option price with respect to
* cost-of-carry).
*
* @param isCall true for call; false for put.
* @param S underlying stock price
* @param X strike price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @param v volatility
* @return theoretical option price
*/
public static double carryRho(final boolean isCall, final double S, final double X, final double T, final double r,
final double b, final double v) {
final double d1 = (Math.log(S / X) + (b + v * v / 2) * T) / (v * Math.sqrt(T));
if (isCall) {
return T * S * Math.exp((b - r) * T) * CND(d1);
} else {
return -T * S * Math.exp((b - r) * T) * CND(-d1);
}
}
/**
* Computes the generalized Black-Scholes strikeDelta (first order partial derivative of option price with respect
* to strike price).
*
* @param isCall true for call; false for put.
* @param S underlying stock price
* @param X strike price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @param v volatility
* @return theoretical option price
*/
public static double strikeDelta(final boolean isCall, final double S, final double X, final double T,
final double r, final double b, final double v) {
final double d1 = (Math.log(S / X) + (b + v * v / 2) * T) / (v * Math.sqrt(T));
final double d2 = d1 - (v * Math.sqrt(T));
if (isCall) {
return -Math.exp(-r * T) * CND(d2);
} else {
return Math.exp(-r * T) * CND(-d2);
}
}
/**
* Generalized Black-Scholes implied vol fitter using a bisection algorithm.
*
* @param P option price
* @param isCall true for call; false for put.
* @param S underlying stock price
* @param X strike price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @return implied volatility
*/
public static double impliedVolBisect(final double P, final Boolean isCall, final double S, final double X,
final double T, final double r, final double b) {
return impliedVolBisect(P, isCall, S, X, T, r, b, EPS, MAX_ITERS);
}
/**
* Generalized Black-Scholes implied vol fitter using a bisection algorithm.
*
* @param P option price
* @param isCall true for call; false for put.
* @param S underlying stock price
* @param X strike price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @param eps volatility convergence tolerance
* @param maxIters maximum number of optimization iterations
* @return implied volatility
*/
public static double impliedVolBisect(final double P, final Boolean isCall, final double S, final double X,
final double T, final double r, final double b, final double eps, final int maxIters) {
if (P == NULL_DOUBLE || isCall == null || S == NULL_DOUBLE || X == NULL_DOUBLE || T == NULL_DOUBLE
|| r == NULL_DOUBLE || b == NULL_DOUBLE) {
return NULL_DOUBLE;
}
if (P == 0) {
return 0.0;
}
if (Double.isNaN(P * S * X * T * r * b)) {
return Double.NaN;
}
double vLow = 1e-4;
double vHigh = 10.0;
for (int i = 0; i < maxIters; i++) {
final double vi = vLow + 0.5 * (vHigh - vLow);
final double pi = price(isCall, S, X, T, r, b, vi);
if (P < pi) {
vHigh = vi;
} else {
vLow = vi;
}
if (Math.abs(vHigh - vLow) < eps) {
return vi;
}
}
return 0.5 * (vLow + vHigh);
}
/**
* Generalized Black-Scholes implied vol fitter using a newton algorithm.
*
* @param P option price
* @param isCall true for call; false for put.
* @param S underlying stock price
* @param X strike price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @return implied volatility
*/
public static double impliedVolNewton(final double P, final Boolean isCall, final double S, final double X,
final double T, final double r, final double b) {
return impliedVolNewton(P, isCall, S, X, T, r, b, EPS, MAX_ITERS);
}
/**
* Generalized Black-Scholes implied vol fitter using a newton algorithm.
*
* @param P option price
* @param isCall true for call; false for put.
* @param S underlying stock price
* @param X strike price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @param eps volatility convergence tolerance
* @param maxIters maximum number of optimization iterations
* @return implied volatility
*/
public static double impliedVolNewton(final double P, final Boolean isCall, final double S, final double X,
final double T, final double r, final double b, final double eps, final int maxIters) {
if (P == NULL_DOUBLE || isCall == null || S == NULL_DOUBLE || X == NULL_DOUBLE || T == NULL_DOUBLE
|| r == NULL_DOUBLE || b == NULL_DOUBLE) {
return NULL_DOUBLE;
}
if (P == 0) {
return 0.0;
}
if (Double.isNaN(P * S * X * T * r * b)) {
return Double.NaN;
}
double vol = 0.4;
for (int i = 0; i < maxIters; i++) {
final double price = price(isCall, S, X, T, r, b, vol);
final double vega = vega(S, X, T, r, b, vol);
final double dvol = -(price - P) / vega;
final double adjDvol = Math.min(dvol, 0.5 * vol);
vol += adjDvol;
if (Math.abs(adjDvol) < eps) {
return vol;
}
}
return vol;
}
/**
* Generalized Black-Scholes implied vol fitter using a newton algorithm based on log(vol).
*
* @param P option price
* @param isCall true for call; false for put.
* @param S underlying stock price
* @param X strike price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @return implied volatility
*/
public static double impliedVolNewtonP(final double P, final Boolean isCall, final double S, final double X,
final double T, final double r, final double b) {
return impliedVolNewtonP(P, isCall, S, X, T, r, b, EPS, MAX_ITERS);
}
/**
* Generalized Black-Scholes implied vol fitter using a newton algorithm based on log(vol).
*
* @param P option price
* @param isCall true for call; false for put.
* @param S underlying stock price
* @param X strike price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @param eps volatility convergence tolerance
* @param maxIters maximum number of optimization iterations
* @return implied volatility
*/
public static double impliedVolNewtonP(final double P, final Boolean isCall, final double S, final double X,
final double T, final double r, final double b, final double eps, final int maxIters) {
if (P == NULL_DOUBLE || isCall == null || S == NULL_DOUBLE || X == NULL_DOUBLE || T == NULL_DOUBLE
|| r == NULL_DOUBLE || b == NULL_DOUBLE) {
return NULL_DOUBLE;
}
if (P == 0) {
return 0.0;
}
if (Double.isNaN(P * S * X * T * r * b)) {
return Double.NaN;
}
double vol = 0.4;
double lnvol = Math.log(vol);
double volOld = 1000;
for (int i = 0; i < maxIters; i++) {
final double price = price(isCall, S, X, T, r, b, vol);
final double vegaP = vol * vega(S, X, T, r, b, vol);
final double dlnvol = -(price - P) / vegaP;
final double adjDlnvol = Math.signum(dlnvol) * Math.min(Math.abs(dlnvol), 0.5);
lnvol += adjDlnvol;
vol = Math.exp(lnvol);
if (Math.abs(vol - volOld) < eps) {
return vol;
}
volOld = vol;
}
return vol;
}
/**
* Finds the Generalized Black-Scholes strike from the delta.
*
* @param delta delta
* @param isCall true for call; false for put.
* @param S underlying stock price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @param v volatility
* @return strike associated with the delta
*/
public static double strikeFromDeltaBisect(final double delta, final Boolean isCall, final double S, final double T,
final double r, final double b, final double v) {
return strikeFromDeltaBisect(delta, isCall, S, T, r, b, v, EPS, MAX_ITERS);
}
/**
* Finds the Generalized Black-Scholes strike from the delta.
*
* @param delta delta
* @param isCall true for call; false for put.
* @param S underlying stock price
* @param T years to expiry
* @param r risk-free rate
* @param b cost-of-carry
* @param v volatility
* @param eps volatility convergence tolerance
* @param maxIters maximum number of optimization iterations
* @return strike associated with the delta
*/
public static double strikeFromDeltaBisect(final double delta, final Boolean isCall, final double S, final double T,
final double r, final double b, final double v, final double eps, final int maxIters) {
if (delta == NULL_DOUBLE || isCall == null || S == NULL_DOUBLE || v == NULL_DOUBLE || T == NULL_DOUBLE
|| r == NULL_DOUBLE || b == NULL_DOUBLE) {
return NULL_DOUBLE;
}
if (Double.isNaN(delta * S * v * T * r * b)) {
return Double.NaN;
}
double xLow = 1e-6;
double xHigh = 1e6; // it is this big to handle BRK-A
for (int i = 0; i < maxIters; i++) {
final double xi = xLow + 0.5 * (xHigh - xLow);
final double di = delta(isCall, S, xi, T, r, b, v);
if (delta > di) {
xHigh = xi;
} else {
xLow = xi;
}
if (Math.abs(xHigh - xLow) < eps) {
return xi;
}
}
return 0.5 * (xLow + xHigh);
}
private static final NormalDistribution nd = new NormalDistribution();
/**
* The cumulative normal distribution function.
*/
private static double CND(final double X) {
final double a1 = 0.31938153, a2 = -0.356563782, a3 = 1.781477937, a4 = -1.821255978, a5 = 1.330274429;
final double L = Math.abs(X);
final double K = 1.0 / (1.0 + 0.2316419 * L);
final double w = 1.0 - 1.0 / Math.sqrt(2.0 * Math.PI) * Math.exp(-L * L / 2) * (a1 * K + a2 * K * K + a3
* Math.pow(K, 3) + a4 * Math.pow(K, 4) + a5 * Math.pow(K, 5));
if (X < 0.0) {
return 1.0 - w;
} else {
return w;
}
}
}
