Bermuda Option

AAA

DEFINITION of 'Bermuda Option'

A type of exotic option that can be exercised only on predetermined dates, typically every month. Bermuda options are a combination of American and European options. American options are exercisable anytime between the purchase date and the date of expiration. European options, conversely, are exercisable only at the date of expiration. Bermuda options are exercisable at the date of expiration, and on certain specified dates that occur between the purchase date and the date of expiration. Other exotic options include binary options and quantity-adjusting options, often called quanto options for short.

INVESTOPEDIA EXPLAINS 'Bermuda Option'

Options are financial derivatives that offer buyers the right, but not the obligation, to buy (call) or sell (put) a security at a particular price on or before a specified date. Bermuda options provide writers with more control over when the options can be exercised, while giving the buyer a contract that is less expensive than an American option, and not as restrictive as a European option. Bermuda options are typically less expensive than American options, because of the larger premiums that American options demand due to their flexibility.

RELATED TERMS
  1. Balloon Option

    An option contract where the strike price increases significantly ...
  2. American Option

    An option that can be exercised anytime during its life. American ...
  3. European Option

    An option that can only be exercised at the end of its life, ...
  4. Exotic Option

    An option that differs from common American or European options ...
  5. Bermuda Swaption

    A derivative financial instrument that gives the holder the right, ...
  6. Option

    A financial derivative that represents a contract sold by one ...
Related Articles
  1. Options Basics Tutorial
    Options & Futures

    Options Basics Tutorial

  2. The Controversy Over Option Expensing
    Options & Futures

    The Controversy Over Option Expensing

  3. When holding an option through expiration ...
    Options & Futures

    When holding an option through expiration ...

  4. What do all of the letters in a stock ...
    Options & Futures

    What do all of the letters in a stock ...

Hot Definitions
  1. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  2. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  3. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  4. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  5. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  6. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
Trading Center