Procedure

Create the following hierarchy to depict a Bermuda option as a generic transaction:In this example, the Bermuda option has two exercise opportunities and a fixed-term deposit as the underlying.

In general, the following applies:

You create an elementary transaction with the Exercise Opportunity transaction form.You then create each individual elementary transaction under the previous elementary transaction, and always one layer deeper.The exercise opportunity with the earliest notification deadline is the first exercise opportunity in the hierarchy, and the exercise opportunity with the latest notification deadline is penultimate exercise opportunity in the hierarchy. The last elementary transaction is the elementary transaction for the underlying.

You can currently use the following transaction forms for the underlying: Mortgage/interest rate instrument, loan, bond, zero bond, fixed-interest-rate bond, participation certificate, fixed-term deposit, commercial paper, swap, forward rate agreement, cash flow, reference to an original transaction or to an external transaction.

Create the hierarchy as follows:

Create a new generic transaction.See Editing Generic Transactions for the procedure.

In the dialog structure, select the first elementary transaction and assign to it transaction form 63 (exercise opportunity).

The system displays three tab pages.

Enter the following information on the Header Information tab page:

Start of term field.

Start of first notice period for the Bermuda option.

Notification By field

End date of notice period for the first exercise opportunity.

Purchase/Sale field

Enter whether the Bermuda option is a purchase or a sale.

The system interprets the Bermuda option as a purchase or a sale depending on the entries you make for the elementary transaction on the highest level of the hierarchy.

On the Options Information tab page, enter the exercise type of the option, and enter the following information:

Exercise Type field

Specify whether American-style or European-style exercise applies to the Bermuda option.

Lead Time field

Time between notice and exercise of the option.

Put/Call Indicator

Flag the Bermuda option as a put option or a call option.

Strike Amount and Strike Currency fields

Clean strike amount of exercise opportunity (price of underlying without accrued interest).

You do not need to enter a strike amount if the underlying is a swap.The system uses the variable side of the swap to determine the strike amount.

Enter the option premium on the Cash Flow tab page.This is cash flow type 9 (charges, commission).

You must enter a term start date for the option, although it is not used by the price calculator for evaluation purposes.

Create a transaction with transaction form 63 (exercise opportunity) for the second exercise option below the Exercise Opportunity elementary transaction.To do this, select the Exercise Opportunity elementary transaction in the dialog structure and choose Create Elementary Trans.: Next Level Select the new elementary transaction and assign to it transaction form 63.

The system displays three tab pages. Make the necessary entries as for step 2.

Note that you need to set the Purchase/Sale indicator for the first exercise opportunity only.The system ignores the Purchase/Sale indicator if it is set in elementary transactions with the Exercise Opportunity transaction form in lower levels of the hierarchy.

In contrast, the entries in the following fields do not have to be the same for all the individual elementary transactions: Start of Term, Notification By, Lead Period .

Note the following restrictions: The start dates of the terms of the individual exercise opportunities must be in chronological order.The start of the notice period for one exercise opportunity must be before the start of the term of the next exercise opportunity.

Create a transaction with transaction form 42 (fixed-term deposit) under the second Exercise Opportunity elementary transaction.Proceed as for step 3.

The system displays two tab pages.

Enter the following information on the Header Information tab page:

Spot/Forward field

Spot transaction

Purchase/Sale field

The underlying must always be flagged as a purchase transaction.

Nominal Amount and Currency

Nominal amount of fixed-term deposit

Choose Back and then Save.

Result

You have created a Bermuda option as a generic transaction.

Example

A bank issues a Bermuda option that gives the purchaser the right to enter into a contract for a fixed-term deposit.The fixed-term deposit would have a nominal volume of 1 million euros and an interest rate of 5%.The fixed-term deposit has a term of two years and starts on 01/01/2006. Repayments and interest payments are made on 12/31/ of each year. The purchaser can exercise the option either on 01/01/2005 at a strike of 980,000 euros, or on 01/01/2006 at a strike of 1,000,000 euros.The lead time for both exercise opportunities is one month. The purchaser must issue notice on the exercise of the option on 12/01/2004 or 12/01/2005.The exercise type is therefore European.