Knowledge

Cross Currency Bermudan Swaption

An embedded Bermudan option in a cross currency swap. It is a contract in which the holder of a cross currency swap is long or short an option to put the swap at certain cash flow payment dates. For example, suppose a fixed leg cross-currency swap payer is long a Bermudan swaption. Then he makes periodic payments based on a fixed rate in a certain currency and receives floating rate payments based on the interest rate of another currency. At certain payment dates he can cancel the swap, or equivalently, he can switch to pay the floating rate and receive the fixed rate. Most cross currency swaptions are fixed-for-floating swaptions. Typical swaptions have fixed notionals for both receive and pay legs, and a single fixed coupon rate for the fixed leg and a single spread for the floating leg