LANGUAGE LAB. Bermuda Option

It is a derivative instrument wherein the holder of the option has the right to exercise his option only on certain pre-defined dates occurring in regular intervals throughout the duration of the contract.

The exotic option gets its name from the fact that Bermuda lies geographically between the US and Europe.

As such, Bermuda options are a hybrid of American and European options.

American options are exercisable anytime between the purchase date and the date of expiration of a contract, while European options are exercisable only on the date when the contract expires. It is sometimes referred to as Modified American option.

But Bermuda option is exercisable on the date of expiry of the contract and on certain specified dates that occur between the purchase date and the date of expiration.

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, but not as restrictive as an European option.

Bermuda options are typically less expensive than American options because of the larger premiums that American options demand due to their flexibility.

Further, Bermuda option contracts are generally traded over the counter. A Bermuda option can apply to a variety of underlying assets.

However, this option tends to be most frequently used with Forex and interest rate contracts (eg Bermuda swaption).

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