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.

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RELATED FAQS
  1. What is a Bermuda swaption?

    The Bermuda swaption refers to a modified American style of option. A swaption is an option on an interest rate swap in which ... Read Answer >>
  2. What is an over-the-counter derivative?

    Learn more about over-the-counter derivatives and how they work with an example of a derivative trade-off exchange. Read Answer >>
  3. What is the difference between derivatives and swaps?

    Find out more about derivative securities, swaps, examples of derivatives and swaps, and the main difference between derivative ... Read Answer >>
  4. What is the difference between derivatives and options?

    Learn how options are one type of derivative and how equity options derive their value from a stock, and understand other ... Read Answer >>
  5. Can bond traders trade on interest rate swaps?

    Read about interest rate swaps and why these transactions are performed by institutional actors in the bond market, not individual ... Read Answer >>
  6. Do interest rate swaps trade on the open market?

    Learn how interest rate swaps are traded on the OTC and interbank markets, and how these swaps can be used to arbitrage different ... Read Answer >>
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