Creational Design Patterns

1
Creational Design Patterns

• Factory Method

2
Outline

• Creational Design Patterns
• Definition
• Application
• Bond
• Zero-coupon bond
• Coupon bearing bond
• Bond pricing
• Instrument valuation framework
• Factory Method
• Design
• Analysis
• Implementation

3
Creational Patterns Definition

• Creational patterns abstract the instantiation
  process.
• Help make the system independent of how objects
  are
• created
• composed, or
• represented.
• Become important as systems evolve to depend more
  on object composition than inheritance.
• Two main themes about creational patterns
• Encapsulate knowledge about which concrete
  classes the system uses.
• Hide how instances of these classes are created
  and put together.

4
Zero-Coupon Bond

• The n-year zero rate is the rate of interest
  earned on an investment that starts today and
  lasts for n years.
• The n-year zero-coupon bond pays all interest and
  principal at the end of n years.
• Example
• A five-year 6-coupon bond for 100 principal
  will pay 100 (10.06)5 133.82 in five years.
• If in two years the market interest rate is 11,
  the bond's price is 133.82 / (10.11)3 97.84
• Has advantage of being free of reinvestment risk.
• However, there is no opportunity to enjoy the
  effect of a rise in market interest rates.

5
Coupon Bearing Bond

• Most bonds provide coupons periodically.
• The owner receives coupon payments.
• The owner also receives the principal at
  maturity.
• Example
• A two-year Treasury with a principal 100
  provides 6 per annum coupons paid semiannually.
• The owner receives
• 6 in six months
• 6 in one year
• 6 in one year and a half
• 106 in two years.

6
Bond Pricing

• Assume the Treasury zero-rates are the following
• 0.5 years 5.5
• 1.0 years 6.0
• 1.5 years 6.5
• 2.0 years 7
• The present value is calculated by properly
  discounting all payments

7
Valuation Framework

• Design a framework to evaluate a financial
  instrument that provides payments to the owner.
• The main classes
• Payment to encapsulate the amount and time
• Instrument (abstract class) to provide interface
  to some financial instrument
• Valuation (abstract) to provide interface and
  implementation to compute various analytics
• Bond a concrete class encapsulating bond
  features
• BondValuation a concrete class to valuate bonds.

8
Valuation Framework Design
9
Factory Method Analysis

• Intent
• Define an interface for creating an object, but
  let subclasses decide which class to instantiate.
• Applicability
• a class can't anticipate the class of objects it
  must create
• a class wants its subclasses to specify the
  objects it creates.
• classes delegate responsibility to one of several
  helper classes, and you want localize the
  knowledge of which helper subclass is the
  delegate.

10
Factory Method Analysis (cont.)

• Participants
• Product (Instrument)
• defines the interface of objects the factory
  method creates
• ConcreteProduct (Bond)
• implements the Product interface
• Creator (Valuation)
• declares the factory method (createInstrument) to
  manufacture a Product.
• may call the factory method in its algorithms.
• ConcreteCreator (BondValuation)
• overrides the factory method to create a concrete
  product.

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Valuation Framework Implementation
struct Payment double term double
amount class Instrument public
Instrument() virtual Instrument()
virtual vectorltPaymentgt getPayments()
return this-gtpayments protected
vectorltPaymentgt payments
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Implementation Bond
class Bond public Instrument public
Bond(double principal, double maturity,
double coupon, double period)
this-gtmaturity maturity ... ... fill
out vectorltPaymentgt ... protected
double principal double maturity double
coupon double period
13
Implementation Valuation
class Valuation public Valuation()
virtual Valuation() virtual double
price() // Call factory method
this-gtinstrument createInstrument() ...
for each payment in this-gtinstrument-gtgetPaymen
ts() ... discount according to market rate
... protected // Factory method
virtual Instrument createInstrument() 0
Instrument instrument
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Implementation BondValuation
class BondValuation public class
Valuation public BondValuation(double
principal, double maturity, double coupon,
double period) this-gtprincipal
principal ... protected //
Factory method virtual Instrument
createInstrument() return new
Bond(this-principal, this-gtmaturity,
this-gtcoupon, this-gtperiod)
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Implementation Usage
int main() //Bond portfolio valuation price
0 for each record BondValuation
val(record.principal, record.maturity,
record.coupon, record.period) price
val.price() cout ltlt "Total price of
portfolio " ltlt price ltlt endl