Bermuda Swaption


DEFINITION of 'Bermuda Swaption'

A derivative financial instrument that gives the holder the right, but not the obligation, to enter into an interest rate swap on any one of a number of predetermined dates. The holder may only exercise the option on one of these dates. By contrast, a plain vanilla swaption would give the holder the option to enter into an interest rate swap on the expiration date of the derivative.

BREAKING DOWN 'Bermuda Swaption'

Swaptions are one of four basic methods for exiting a swap before its termination date. The swaption basically allows the investor to offset the swap he or she wishes to exit. Bermuda swaptions function in a similar manner to Bermuda options which can only be exercised on predetermined dates and thus have to often be valued using Monte Carlo Simulation rather than other, more common, option pricing models.

  1. Call Swaption

    A type of option between two parties that can be exercised on ...
  2. Reverse Swap

    An exchange of cash flow streams that undoes the effects of an ...
  3. Interest Rate Swap

    An agreement between two parties (known as counterparties) where ...
  4. Exercise

    To put into effect the right specified in a contract. In options ...
  5. Swaption (Swap Option)

    The option to enter into an interest rate swap. In exchange for ...
  6. Bermuda Option

    A type of exotic option that can be exercised only on predetermined ...
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