Bermudan Options with the Binomial Model

Report
Sheila Farrahi
Amirhossein Heydarizadeh
Oluwayinka Ogunniyi


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.

similar documents