What is a Bermuda swaption?

By Richard Wilson AAA
A:

The



Bermuda swaption refers to a modified American style of option. A swaption is an option on an interest rate swap in which the buyer has the ability to enter into an interest rate swap agreement at a prearranged future date. However, the Bermuda swaption has prearranged limitations and rules on when to exercise.



The Bermuda swaption differs from other swaptions because it grants the holder the right to enter into an interest rate swap at each exercise date in a schedule, provided that the holder has not exercised the right at any previous time. In other words, the Bermuda swaption can be exercised on several different days rather than on one day only.



For more on this topic, read An Introduction to Swaps and Exotic Options: A Getaway From Ordinary Trading.



This question was answered by Richard C. Wilson.



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