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# Bermudan Options with the Binomial Model - PowerPoint PPT Presentation

Bermudan Options with the Binomial Model. Sheila Farrahi Amirhossein Heydarizadeh Oluwayinka Ogunniyi . Bermudan Option. Like Bermudian islands which are located between Europe and America, Bermudan options are a combination of American and European options .

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### Bermudan Options with the Binomial Model

Sheila Farrahi

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.