Consider a 2-into-3-year Bermudan swaption (i.e., an option to obtain a swap that starts in 2 years and matures in 5 years). Consider the following statements: I. A lower bound on the Bermudan price is a 2-into-3-year European swaption. II. An upper bound on the Bermudan price is a cap that starts in 2 years and matures in 5 years. III. A lower bound on the Bermudan price is a 2-into-5 year European option.Which of the following statements is(are) true? a. I only b. II only c. I and II d. III only
Just a guess but i’ll go with C
that’s right; explain please. Thanks.
Well III can’t be correct cuz that matures in 7 years. Eliminates D. I believe a Bermudan swaption can be be exercised before maturity on certain dates. So its not american but its also not european. We know that options are valuable, so any chance you have to excercise before maturity means that the lowest value a Bermudan option can have is the value of the same option but Euopean (I). Eliminates B. FRM’s are essentially a series of caps if memory serves me correctly (this goes back a while for me, so bear with me). Given that II starts in 2 years and matures in 5 it alignes with teh Bermudan swaption. I’m not sure exactly how i know this one is correct to be honest just something in my memory said ‘yes’. Eliminating A. helps?
i saw this question from the Handbook. I skipped it. This is not going to be on the exam. Bermudian options were not part of the AIM for 2007.
you should take a look at the AIM statements. you can download them from the site. as a matter of fact, swaptions are not covered in this years FRM. just basic Swap.
lxwqh…click “exams”…then look on the right for AIM Statements.