Bermuda Option

A Bermuda option is a hybrid between a European option (exercisable only at expiry) and an American option (exercisable at any time before expiry). It can be exercised only on specific predetermined dates during its life — for example, on the last trading day of each month over a six-month period. The name derives from Bermuda's geographical position between the Americas and Europe, reflecting the hybrid nature of the instrument. Bermuda options are widely used in interest rate derivatives, callable bonds, and mortgage-backed securities where early redemption rights apply on specific dates. They are priced using tree-based or Monte Carlo simulation methods that account for the discrete exercise opportunities. In India, Bermuda-style features appear in certain structured bonds and hybrid debt instruments.