Swaption study

A Bermudan swaption is a swaption where the owner has the right to enter into the underlying swap either on the swaption's expiry date or on a number of other predefined exercise dates after that expiry date.

1 How is this different from a regular swaption?
In a regular swaption the holder has the right to enter into the underlying swap only on the swaption's expiry date.
If you enter into the swap on a exercise date after the swaption's actual expiry date, then the actual time of the swap decreases. This is because the swap's expiry date does not change, it always stays the same.
For example, you enter into a Bermudan swaption with a swaption expiry date of 2 years (June 25, 2008) that gives you the right to enter into a swap for 5 years, with extra exercise dates after 3 years (June 25, 2009) and 4 years (June 25, 2010). If you enter into the swap on the swaption expiry date (June 25, 2008), the underlying swap you enter into is for the entire period, i.e., 5 years. However, if you only decide to exercise the swap on June 25, 2009, the underlying swap is only for 4 years.
A Bermudan swaption is always swap settled.

2 What is meant by Actual/360 or Actual/365 convention?
This is a method of translating calendar time into years for the purpose of determining applicable cashflow using interest rate quoted on per annum basis.
For example, what should be the cashflow between the dates Jan 20,2008 to Mar 20,2008 if the interest quoted on per annum basis is 5% and principal amount=100$?

Actual days between the two dates=62 days
According to Actual/360 conevtion, the payment will be:
100*(1+0.05*62/360)

While according to Actual/365 conevtion, the payment will be:
100*(1+0.05*62/365)

3 Trading and financial assets
In derivatives trading or for financial instruments, the concept of a position is used heavily. There are two basic types of position: a long and a short.

Traded options will be used in the following explanations. The same principle applies for futures and other securities. For simplicity, only one contract is being traded in these examples.

Long position
When a trader buys an option contract that she has not already written (i.e. sold), she is said to be opening a long position.
When a trader sells an option contract that she already owns, she is said to be closing a long position.
When a trader is 'long', he/she wins when the price increases, and loses when the price decreases.
Short position
When a trader writes (i.e. sells) an option contract that she does not already own, she is said to be opening a short position.
When a trader buys an option contract that she has written (i.e. sold), she is said to be closing a short position.
When a trader is 'short', he/she wins when the price decreases, and loses when the price increases.
The long and the short of it is that: buyers are referred to as the long; and sellers are referred to as the short.

Net positionNet position is the difference between total open long (receivable) and open short (payable) positions in a given assets (security, foreign exchange currency, commodity, etc...) held by an individual. This also refers the amount of assets held by a person, firm, or financial institution as well as the ownership status of a person's or institution's investments.

4 Underlying
What supports the security or instrument that parties agree to exchange in a derivative contract.

5 Three of the most common option trading acronyms are OTM, ATM, and ITM.

OTM - Out of the Money
When an option is "out of the money," it has not yet reached the strike price. The option has no intrinsic value, only potential value based on time remaining before expiration, expectations of underlying stock price movement, etc.
ATM - At the Money
An option that is "at the money" has reached the strike price. An option that has reached its strike price can now be exercised.
ITM - In the Money
When an option is "in the money," that means it has gone beyond the strike price. Now the option has intrinsic value not based on speculation.

 

http://nccuir.lib.nccu.edu.tw/bitstream/140.119/33995/8/35202208.pdf 

http://doc.mbalib.com/view/d8ac7fe1492dac91c8ce8546c24b9793.html