Ordering Bermudan swaptions Consider the following six interest rate options, where 0 ∗
II. A 1yr-into-10yr K-strike Bermudan payer swaption, where Bank A has the right to exercise at T = 1 and annually thereafter, into a swap with final maturity T = 11.
III. A 1yr-into-10yr K-strike Bermudan payer swaption, where Bank A has the right to exercise at T = 1 and semi-annually thereafter, into a swap with final maturity T = 11.
IV. A 1yr-into-10yr K∗-strike European payer swaption.
V. A 1yr-into-10yr K-strike American style payer swaption defined as follows. Bank A has the right to exercise at any time up to T = 1. If Bank A exercises at time T0, 0 ≤ T0 ≤ 1, Bank A pays fixed on a swap from T0 to T0 + 10.
VI. A 1yr-into-10yr K-strike American style payer swaption defined as follows. Bank A has the right to exercise at any time up to T = 1. If Bank A exercises at time T0, 0 ≤ T0 ≤ 1, Bank A pays fixed on a swap from T = 1 to T = 11.
For each pair of options (a)-(g) in Table below, determine the best relationship between their values to Bank A at time t = 0 from choices =, ≥, ≤ and ?, where ? means the relationship is indeterminate.
