Calculating DV01 using futile.paradigm

April 25, 2011
By

[This article was first published on Cartesian Faith » R, and kindly contributed to R-bloggers]. (You can report issue about the content on this page here)
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Here’s a short example of using the futile.paradigm for calculating the DV01 of a bond. The basic idea is to layout the type definitions and then create the functions to do the calculations.

require(futile.paradigm)

create.Bond <- function(T, par, coupon, yield, periods, freq)
{
  list(par=par, coupon=coupon, yield=yield, periods=periods, freq=freq)
}

# Inherit from the Bond type
create.SemiBond <- function(T, par, coupon, yield, periods, freq=2)
  create(Bond, par, coupon, yield, periods, freq)

price.bond %when% (bond %isa% Bond)
price.bond <- function(bond) price(bond, bond$yield)

price.bondy %when% (bond %isa% Bond)
price.bondy <- function(bond, r)
{
  r <- r / bond$freq
  n <- bond$periods
  coupon(bond) * (1 - (1+r)^-n) / r + bond$par * (1+r)^-n
}

dv01.bond %when% (bond %isa% Bond)
dv01.bond <- function(bond)
{
  y1 <- bond$yield - 0.0001
  y2 <- bond$yield + 0.0001
  p1 <- price(bond, y1)
  p2 <- price(bond, y2)
  - (p1 - p2) / (y1 - y2) / 100
}

The helper functions below show some of the power of guards. Depending on the value of a field, a different function variant can be called for the coupon calculation. (Note that this is used for illustrative purposes and would break down in the current ZIRP world.)

# When coupon is in percentage terms
coupon.pct %when% (bond %isa% Bond && bond$coupon < 1)
coupon.pct <- function(bond) bond$par * bond$coupon / bond$freq

coupon.dollar %when% (bond %isa% Bond)
coupon.dollar <- function(bond) bond$coupon / bond$freq

The code can be run by executing the below snippet.

> b <- create(SemiBond, 100,3.5, 0.035, 10)
> dv01(b)
[1] 8.376442

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