A Bermudan derivative which constitutes a Bermudan option on a swap. It is an option on a swap that allows the holder (the option’s buyer or the long) to exercise on every reset date of the underlying swap up to, and including, the option’s expiration date. If exercised, the buyer enters into a swap that starts at the exercise date and expires at a fixed date in the future. In other words, this option confers on the holder or owner the right to enter into a forward swap, at several possible exercise dates. For example, a firm after issuing a fixed-coupon callable bond entered into an interest rate swap to convert the fixed coupon payments to floating payments. The firm has the right to call back the bond from investors at specific dates during its maturity. If the bond is called, the firm would still be exposed to its position in the interest rate swap. So, and in order for the firm to cater for that exposure, it better would have entered into a Bermudan swaption at the time of bond issue. The exercise dates of the swaption should coincide with the bond’s callable dates. Having done that, the interest rate exposure the issuing firm faces would cease to exist if the swaption is exercised following the calling of the bond.

A Bermudan swaption is equivalent to a Bermudan option on a coupon bond whose par value is equal to the option’s strike price.

Variations of Bermudan swaptions include Bermudan forward swaptions, constant maturity Bermudan swaptions, fixed-tail Bermudan swaptions, etc.