core.test_payoff

Tests for hedge payoff calculation functions.

Tests the pure functions in f.domains.hedge.core.payoff:

  • calculate_put_payoff_at_spot
  • calculate_total_hedge_payoff_at_spot

Each function has 3 tests covering different scenarios.

EXCEL VERIFICATION GUIDE

For a mathematician to verify these tests in Excel:

  1. Single Put Payoff:

    • Formula: =MAX(Strike - Spot, 0) * Quantity

  2. Total Portfolio Payoff:

    • List positions in a table (Strike, Quantity).
    • Calculate individual payoffs using the formula above.
    • Sum the results: =SUM(PayoffColumn).
@pytest.fixture
def sample_positions():

Create sample hedge positions for testing.

def test_put_payoff_itm():

Test: ITM put option payoff.

NUMERICAL EXAMPLE

Input: strike = 2500 quantity = 10 spot_price = 2200

Calculation: intrinsic = max(2500 - 2200, 0) = 300 payoff = 300 × 10 = 3000

Expected: payoff = 3000

EXCEL REPRODUCTION

1. Inputs (Cells A1:B3)

Cell Parameter Value
B1 Strike 2500
B2 Spot 2200
B3 Quantity 10

2. Calculation (Cells A4:B4)

Cell Name Formula Expectation
B4 Payoff =MAX(B1-B2, 0) * B3 3000
def test_put_payoff_otm():

Test: OTM put option payoff (should be zero).

NUMERICAL EXAMPLE

Input: strike = 2500 quantity = 10 spot_price = 3000

Calculation: intrinsic = max(2500 - 3000, 0) = max(-500, 0) = 0 payoff = 0 × 10 = 0

Expected: payoff = 0

def test_put_payoff_atm():

Test: ATM put option payoff (exactly at strike, should be zero).

NUMERICAL EXAMPLE

Input: strike = 2500 quantity = 10 spot_price = 2500

Calculation: intrinsic = max(2500 - 2500, 0) = 0 payoff = 0 × 10 = 0

Expected: payoff = 0

def test_total_payoff_multiple_positions(sample_positions):

Test: Total payoff from multiple positions.

NUMERICAL EXAMPLE

Input: Positions: [Put 2200 × 10, Put 2600 × 5] spot_price = 2000

Calculation: Put 2200: max(2200 - 2000, 0) × 10 = 200 × 10 = 2000 Put 2600: max(2600 - 2000, 0) × 5 = 600 × 5 = 3000 Total = 2000 + 3000 = 5000

Expected: total_payoff = 5000

EXCEL REPRODUCTION

1. Global Inputs (Cell B1)

Cell Parameter Value
B1 SpotPrice 2000

2. Positions Table (Columns A, B, C)

Row Strike (A) Quantity (B) Payoff (C)
3 2200 10 =MAX(A3-B$1, 0) * B3
4 2600 5 =MAX(A4-B$1, 0) * B4

3. Total (Cell C5)

Cell Name Formula Expectation
C5 Total =SUM(C3:C4)| 5000
def test_total_payoff_single_position():

Test: Total payoff from single position.

NUMERICAL EXAMPLE

Input: Positions: [Put 2500 × 8] spot_price = 2300

Calculation: Put 2500: max(2500 - 2300, 0) × 8 = 200 × 8 = 1600 Total = 1600

Expected: total_payoff = 1600

def test_total_payoff_empty_positions():

Test: Total payoff from empty position list.

NUMERICAL EXAMPLE

Input: Positions: [] spot_price = 2000

Expected: total_payoff = 0