Like Bermudian islands which are located between Europe and America, Bermudan options are a combination of American and European options. Bermudan option is a type of option which can only be exercised at specific dates between the issue date and maturity.
Binomial model is a very popular model for option pricing, Binomial tree shows different ways that stock price can move during option’s life time based on certain probability of moving up or either down.
Cox-Ross-Rubenstein formula is the most common formula for the binomial tree so in our model we used Cox-Ross-Rubenstein formulas.
European put and call option at the final nodes: Other nodes:
American put and call option at the final nodes: Other nodes:
Consider a 6-step binomial tree with T=1.5 year and the Bermudan option can only be exercised once a year.