19.3.2 Bermudan Expiry

A Bermudan option is an option where the buyer has the right to exercise at a set (always discretely spaced) number of times. This is intermediate between a European option—which allows exercise at a single time, namely expiry—and an American option, which allows exercise at any time.

The Forward Induction Method is used for valuing the embedded option in the case of Bermudan Expiry. This method would work from the first option expiry date, closest to the as of date, and determine if it is exercisable (in the money) by considering the remaining cash flows to maturity. If not, it would move to the next execution date and again discount the remaining Cash Flows to maturity. If the option is in the money for an Expiration Date, the option would be executed, and no further decisioning made.