Explanation:
Choice A is incorrect; the answer describes a compound option. Choice B is correct; the early exercise of a Bermudan option is restricted to specific dates, as opposed to the standard American option, which can be exercised early at any time prior to maturity. Choice C is incorrect; the answer describes a binary option. Choice D is incorrect; the answer describes a chooser option.
(Book 3, Module 41.1, LO 41.d)
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Question 32
An options trader is evaluating the differences among nonstandard options. In particular, she is interested in the nonstandard payoffs of some lesser-known exotic derivatives. Which of the following statements best describes why a Bermudan option is a nonstandard option?
A
It is an option on an option.
B
Exercise of the option is restricted to specific dates.
C
Its payoff is not continuous and is either zero or a set dollar amount.
D
It can be either a put option or a call option, depending on the buyer’s preference, after a certain period of time has elapsed.
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