Bermudan Option is an option contract where the buyer has the right to exercise at a pre-set number of times. The exercise times are always discretely spaced. In terms of its payoff structure, Bermudan option falls somewhere between European option (exercise allowed at expiry) and American option (exercise allowed on any day).
In practice, pricing of Bermudan options is closely related to pricing of American options because the former can be viewed as a discrete approximation of the latter. Bermudan options on simple underlying assets can be priced by backward induction in binomial / trinomial tree models and methods of dynamic programming. Bermudan options on complex underlying assets (not freely traded and dependent on many factors) or exotic structures with Bermudan features can be priced using the Longstaff-Schwartz procedure and methods of reinforcement learning.
BERMUDAN OPTION REFERENCES
Longstaff, F. A., & Schwartz, E. S. (2001). Valuing American Options by Simulation: A Simple Least-Squares Approach. Review of Financial Studies vol. 14.
Hull, J. (2011). Options, Futures, and Other Derivatives (8th ed). Pearson / Prentice Hall.
Lipton, A. (2001). Mathematical Methods for Foreign Exchange: A Financial Engineer's Approach. World Scientific.
Bouzoubaa, M. (2010). Exotic Options and Hybrids: A Guide to Structuring, Pricing and Trading. Wiley.
Nelken, I., ed (1996). The Handbook of Exotic Options: Instruments, Analysis and Applications. McGraw-Hill.
Taleb, N. (1997). Dynamic Hedging: Managing Vanilla and Exotic Options. Wiley Finance, New York.
Huang, S., & Guo, M. (2008). Valuation of Multidimensional Bermudan Options. Applied Quantitative Finance (book), Part III, pp. 295-309. Springer-Verlag Berlin Heidelberg.
Belomestny, D., Dickmann, F., & Nagapetyan, T. (2015). Pricing Bermudan Options via Multilevel Approximation Methods. SIAM J. Finan. Math., 6(1), pp. 448–466.
Rogers, L. C. G. (2010). Dual Valuation and Hedging of Bermudan Options. SIAM J. Finan. Math., 1(1), pp. 604–608.
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