Matching Bloomberg's CDSO using quantlib CdsOption

[laj007]

Hello - I'm trying to use CdsOption in order to price CDS payer/receiver options. Been through pretty much everything online, but still can't match what I see in BBG's CDSO function.

For instance, with valuation date 4/1/2022, reference spread 66bps, strike 75bps, expiry 6/15/2022, and vol 50%, one should see a price in the 0.1687 area. The way I do it (see below) gets me closer to 0.1272 (NPV). Similarly my forward spread is off too (~65.4bps vs BBG's ~68.2bps).

I'm using all usual input (e.g. discount curve) that prices/matches the underlying CDS perfectly, so am quite sure the issue is not on that front, but rather in the logic I'm using.

For instance, I get a little confused as to how to specify the strike given it's not an explicit input in CdsOption. Another potential source of issue is that CdsOption seems to only take CDS defined on a running-spread basis rather than conventional pricing.

Code below.

Thanks so much for the help !

side= 'Pay'
ref = 65
cpn = 100
recovery = 0.4
tradeDate = ql.Date(1, 4, 2022)   
expiry = ql.Date(15,  6, 2022) 
tenor = 5
vol = 0.5
strike = 75

ref /= 1e4
cpn /= 1e4
strike /= 1e4


if side == 'Pay':
    
    sideCDS = ql.Protection.Buyer

elif side == 'Rec': 
    
    sideCDS = ql.Protection.Seller

termDate    = cdsMat(tenor,runDate)

ql.Settings.instance().setEvaluationDate(tradeDate)


# underlying cds to get probabilityCurve

cdsSchedule = ql.Schedule(tradeDate, termDate,
                          3*ql.Period(ql.Monthly),
                          ql.WeekendsOnly(),
                          ql.Following, ql.Unadjusted,
                          ql.DateGeneration.CDS, False)

quotedTrade = ql.CreditDefaultSwap( ql.Protection.Seller, 100, 0, ref, cdsSchedule,
                                    ql.Following,ql.Actual360(),True,True,tradeDate+1,
                                    ql.WeekendsOnly().advance(tradeDate,3*ql.Period(ql.Daily)),
                                    ql.FaceValueClaim(), ql.Actual360(True))

h = quotedTrade.impliedHazardRate(0, # target NPV
                                  discCurve,
                                  ql.Actual365Fixed(), # dayCounter
                                  recovery,
                                  1e-10, # accuracy
                                  ql.CreditDefaultSwap.ISDA) # model

probabilityCurve = ql.RelinkableDefaultProbabilityTermStructureHandle()

probabilityCurve.linkTo(ql.FlatHazardRate(0,ql.WeekendsOnly(),
                        ql.QuoteHandle(ql.SimpleQuote(h)),
                        ql.Actual365Fixed()))

engine = ql.IsdaCdsEngine(probabilityCurve,recovery,discCurve)

quotedTrade.setPricingEngine(engine)


# underlying CDS - for option pricer (using strike as spread ?)

cds = ql.CreditDefaultSwap(sideCDS, 100, strike, cdsSchedule, ql.Following, ql.Actual365Fixed())
engine = ql.IsdaCdsEngine(probabilityCurve,recovery,discCurve)
cds.setPricingEngine(engine)

vol = ql.QuoteHandle(ql.SimpleQuote(vol))
expiry = ql.Date(expiry.day,expiry.month,expiry.year) 
exercise = ql.EuropeanExercise(expiry)

cds_option = ql.CdsOption(cds, exercise, knocksOut=True)
cds_option.setPricingEngine((ql.BlackCdsOptionEngine(probabilityCurve, recovery, discCurve, vol)))

cds_option.NPV()
cds_option.atmRate()*1e4

[boring-cyborg]

Thanks for posting! It might take a while before we look at your issue, so don't worry if there seems to be no feedback. We'll get to it.

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[qmarsun]

what you get using mathworks.
https://www.mathworks.com/help/fininst/cdsoptprice.html
Click Button "Try This example"
https://www.mathworks.com/help/fininst/cdsoptprice.html#cdsoptprice_example1

[thrasibule]

I think you should be using knocksOut=False. There is no knockout for indices.