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…ion engines FdG2SwaptionEngine::calculate() and FdHullWhiteSwaptionEngine::calculate() never checked arguments_.settlementType/settlementMethod at all. Both value a European swaption with FdmAffineModelSwapInnerValue, which replicates the exercise payoff from the underlying swap's own cashflows under the short-rate model -- the same physical-style payoff a Physical and a Cash+CollateralizedCashPrice settled swaption share by definition. Without a guard, a Cash+ParYieldCurve swaption -- whose payoff genuinely differs (an annuity-based formula this approach doesn't implement) -- was silently priced as if it were physically exercised instead of being rejected. Every other engine valuing a swaption this way already guards with `settlementMethod != Settlement::ParYieldCurve` (JamshidianSwaptionEngine, Gaussian1dJamshidianSwaptionEngine, Gaussian1dSwaptionEngine, Gaussian1dNonstandardSwaptionEngine, Gaussian1dFloatFloatSwaptionEngine, TreeSwaptionEngine, and now G2SwaptionEngine per lballabio#2996); these two finite-difference engines were simply missing the check entirely. Adds testFdSwaptionEnginesCashSettlement in test-suite/bermudanswaption.cpp, checking both engines price a Cash+CollateralizedCashPrice swaption identically to the same swaption settled Physically, and that Cash+ParYieldCurve is now correctly rejected (previously silently priced with no error). Co-Authored-By: Claude Sonnet 5 <noreply@anthropic.com>
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🟡 Changes recommended
The test description incorrectly presents pre-fix behavior as current, although both engines now reject ParYieldCurve rather than silently pricing it as physical settlement.
1 open issue
What changed in this PR
This PR prevents finite-difference swaption engines from silently pricing unsupported ParYieldCurve settlement, aligning them with other short-rate swaption engines.
Changes:
- Add settlement-method guards to the Hull–White and G2 finite-difference engines.
- Add regression coverage for physical/collateralized-cash price equivalence and rejection of
ParYieldCurvesettlement.
| File | Description |
|---|---|
test-suite/bermudanswaption.cpp |
Tests supported settlement equivalence and unsupported settlement rejection in both engines. |
ql/pricingengines/swaption/fdhullwhiteswaptionengine.cpp |
Rejects ParYieldCurve settlement before Hull–White valuation. |
ql/pricingengines/swaption/fdg2swaptionengine.cpp |
Rejects ParYieldCurve settlement before G2 valuation. |
Review effort: Balanced
Comment on lines
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| // settled swaption share by definition. Neither engine validates | ||
| // settlementType/settlementMethod at all, so a Cash+ParYieldCurve | ||
| // swaption (whose payoff genuinely differs -- an annuity-based formula | ||
| // this approach doesn't implement) is silently priced as if it were | ||
| // physically exercised instead of being rejected. |
Author
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Good catch, fixed in 16fc394 — reworded to past tense for the original defect and added a sentence stating what the test verifies now (that Physical/Cash+CollateralizedCashPrice still price identically and Cash+ParYieldCurve is rejected).
The comment described the pre-fix behavior (no settlement validation, silent physical-style pricing of ParYieldCurve) in the present tense, as if it were still current. Reworded to past tense for the original defect and added a sentence describing what the test verifies now. Co-worked with Claude Code
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Summary
FdG2SwaptionEngine::calculate()andFdHullWhiteSwaptionEngine::calculate()never checkedarguments_.settlementType/settlementMethodat all. Both value a European swaption withFdmAffineModelSwapInnerValue, which replicates the exercise payoff from the underlying swap's own cashflows under the short-rate model — the same physical-style payoff aPhysicaland aCash+CollateralizedCashPricesettled swaption share by definition. Without a guard, aCash+ParYieldCurveswaption — whose payoff genuinely differs (an annuity-based formula this approach doesn't implement) — was silently priced as if it were physically exercised instead of being rejected.Every other engine valuing a swaption this way already guards with
settlementMethod != Settlement::ParYieldCurve:JamshidianSwaptionEngineGaussian1dJamshidianSwaptionEngineGaussian1dSwaptionEngineGaussian1dNonstandardSwaptionEngineGaussian1dFloatFloatSwaptionEngineTreeSwaptionEngineG2SwaptionEngine(per Allow G2SwaptionEngine to price cash-settled (CollateralizedCashPrice) swaptions #2996)These two finite-difference engines were simply missing the check entirely — a related but distinct defect from #2996 (that one over-rejected a valid input with a loud error; this one silently mis-prices an unsupported one with no error at all).
Test plan
testFdSwaptionEnginesCashSettlementintest-suite/bermudanswaption.cpp: for bothFdHullWhiteSwaptionEngineandFdG2SwaptionEngine, prices the same European swaption underSettlement::PhysicalandSettlement::Cash+CollateralizedCashPriceand checks the NPVs match, and confirmsCash+ParYieldCurveis now correctly rejected."exception Error expected but not raised"on theParYieldCurvecase, for both engines) and passes with the fix.BermudanSwaptionTestssuite — all pass.🤖 Co-worked with Claude Code