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Published byAden Shorrock Modified over 2 years ago

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Sheila Farrahi Amirhossein Heydarizadeh Oluwayinka Ogunniyi

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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.

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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.

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Cox-Ross-Rubenstein formula is the most common formula for the binomial tree so in our model we used Cox-Ross-Rubenstein formulas.

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European put and call option at the final nodes: Other nodes:

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American put and call option at the final nodes: Other nodes:

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Consider a 6-step binomial tree with T=1.5 year and the Bermudan option can only be exercised once a year.

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