Creational Design Patterns
Factory Method
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Outline
• Creational Design Patterns
– Definition
• Application
– Bond
• Zero-coupon bond
• Coupon bearing bond
• Bond pricing
– Instrument valuation framework
• Factory Method
– Design
– Analysis
– Implementation
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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.
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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 (1+0.06)5 = $133.82 in five years.
– If in two years the market interest rate is 11%, the bond's
price is $133.82 / (1+0.11)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.
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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:
•
•
•
•
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$6 in six months
$6 in one year
$6 in one year and a half
$106 in two years.
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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:
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$6 1.055
0.5
$6 1.065
1.5
1
 $6 1.06 
 $106 1.07
2
CS 631: Creational Design Patterns
 $109.54
6
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.
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Valuation Framework: Design
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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.
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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 vector<Payment>
getPayments() {return this->payments;}
protected:
vector<Payment> payments;
};
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Implementation: Bond
class Bond : public Instrument
{
public:
Bond(double principal,
double maturity, double coupon, double period)
{
this->maturity = maturity;
...
... fill out vector<Payment> ...
}
protected:
double principal;
double maturity;
double coupon;
double period;
};
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Implementation: Valuation
class Valuation
{
public:
Valuation() {}
virtual ~Valuation() {}
virtual double price()
{
// Call factory method
this->instrument = createInstrument();
...
for each payment in this->instrument->getPayments()
... 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->principal = principal;
...
}
protected:
// Factory method
virtual Instrument* createInstrument()
{
return new Bond(this-principal, this->maturity,
this->coupon, this->period);
}
};
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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 << "Total price of portfolio: " << price << endl;
}
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