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Bermudan Swaptions

Bermudan swaptions are instruments that are only exercisable on recurring coupon dates, making them partly American and partly European swaptions. Similarly, on a cost scale, Bermudans fall between American and European swaptions. This course describes the fundamentals of Bermudan swaptions, outlines some applications of these instruments and explains in detail how they are valued using trinomial trees.

  • OBJECTIVES

    On completion of this course, you will be able to:

    Recognize the structure of Bermudan swaptions and distinguish them from other types of swaptions

    Identify the uses of Bermudan swaptions

    Analyze the various pricing and valuation approaches for Bermudan swaptions

  • COURSE OUTLINE

    Topic 1: Bermudan Swaption Basics

    Swaption Structure & Types

    Swaption Comparison

    Bermudan Swaption Transactions

    Topic 2: Bermudan Swaption Applications

    Evolution of Swaption Applications

    An Application – Hedging Callable Bonds

    Uses of Bermudan Swaptions – An Example

    o Single Callable Bond

    o Multiple Callable

    Topic 3: Bermudan Swaption Valuation

    Bermudan Swaption Valuation Methods

    Trinomial Trees

    The Hull-White Model

    Tree Construction with Hull White Model

    o Short Term Rate Tree

    o Forward Swap Rates Tree

    o Forward Strike Swap PV Tree

    o Determining Exercise from the Forward Stroke Swap PV Tree

    o Probabilities for Each Node

    Other Pricing Models

    Swaption Volatilities

    Calculating Swaption Volatilities

    Term Structure Comparison

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    60 Minutes

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