Bermudan Option

Bermudan options sit between European and American options. A European option can be exercised only at expiry. An American option can be exercised at any time. A Bermudan option can be exercised on a set schedule, such as once a month or once a quarter. The name is a playful reference to Bermuda being located between Europe and America.

For example, a Bermudan option with a one-year life might allow exercise on the last business day of each quarter. The holder can decide on each of those dates whether to exercise or wait.

Because they offer more flexibility than European options but less than American options, Bermudan options are typically priced between the two.

Bermudan options are mainly found in over-the-counter markets, particularly in interest rate products. A common example is a Bermudan swaption, which gives the right to enter an interest rate swap on certain dates. They are also embedded in some callable bonds, which the issuer can repay early only on specific dates.