Plain vanilla refers to a basic
version or standard form of financial instruments that include swaps, futures,
options, and bonds. It is just the reverse of so called exotic financial
instruments.
Generally speaking, exotic
instruments change the elements that make up the conventional or traditional financial instruments that result in complex security. This can be better
understood with the help of an example.
instruments change the elements that make up the conventional or traditional financial instruments that result in complex security. This can be better
understood with the help of an example.
A plain vanilla option is a basic
type of financial instrument that does not have additional features and has
just a strike price and an expiration date. On the other hand, exotic option
comes with additional features like “knock-in option”, which allows the option
to become active only at a set price point.
type of financial instrument that does not have additional features and has
just a strike price and an expiration date. On the other hand, exotic option
comes with additional features like “knock-in option”, which allows the option
to become active only at a set price point.
What are the basics of Plain Vanilla?
It is referred to as any “tradable asset” or a financial instrument or asset that is available in its basic form
or standard form. This concept can be applied not just to the trading
strategies but also to various financial instruments like stocks and bonds. Let
us understand with the help of an example.
or standard form. This concept can be applied not just to the trading
strategies but also to various financial instruments like stocks and bonds. Let
us understand with the help of an example.
An option is basically a contract
that allows a buyer of the option to enjoy the right to buy it but he is not
under an obligation to trade an underlying asset at a specified price either on
or before a certain given date.
that allows a buyer of the option to enjoy the right to buy it but he is not
under an obligation to trade an underlying asset at a specified price either on
or before a certain given date.
A Vanilla option is just a put or
call option without complicated or additional features but has basic or
standardized terms or features attached to it.
call option without complicated or additional features but has basic or
standardized terms or features attached to it.
With options, the more is the
specified rules or norms, more are the chances of these financial instruments
being associated with various regions or territories like American-style option
or European style option. However, the term ‘Vanilla’ may be referred to any
basic option that has no frills attached to it.
specified rules or norms, more are the chances of these financial instruments
being associated with various regions or territories like American-style option
or European style option. However, the term ‘Vanilla’ may be referred to any
basic option that has no frills attached to it.
Difference between exotic option financial instruments
Having talked about the simplest form
of financial instrument or option, let us find out how it differs from exotic,
which is just the opposite. An exotic option has additional and complicated
features. Also, there are special “circumstances” that differentiate them
between various styles, namely, American style option and European style
option.
of financial instrument or option, let us find out how it differs from exotic,
which is just the opposite. An exotic option has additional and complicated
features. Also, there are special “circumstances” that differentiate them
between various styles, namely, American style option and European style
option.
Most importantly, the exotic options
have to be understood well before they can be traded. Also, they are much more
risky and you will have to be a veteran in the financial markets in order to successfully
trade them. These assets are usually traded over the counter. Examples of
exotic options include digital options or binary options.
have to be understood well before they can be traded. Also, they are much more
risky and you will have to be a veteran in the financial markets in order to successfully
trade them. These assets are usually traded over the counter. Examples of
exotic options include digital options or binary options.
In these types of options, the
proceeds that are generated are usually offered in a lump sum amount and not in
payout methods that gradually increases over time. However, you must be aware
of the terms and conditions under which the payout is offered, particularly if
it is in lump sum. Two other prominent exotic options include Quantity
Adjusting options and Bermuda options.
proceeds that are generated are usually offered in a lump sum amount and not in
payout methods that gradually increases over time. However, you must be aware
of the terms and conditions under which the payout is offered, particularly if
it is in lump sum. Two other prominent exotic options include Quantity
Adjusting options and Bermuda options.
Plain Vanilla Swaps
Plain Vanilla swaps are not unheard
of. These are agreements that are written between 2 parties so that there is exchange
of sequence of cash flow. And this occurs for a predetermined time period that
is governed by terms and conditions that may include foreign exchange rate and
interest rate payment.
of. These are agreements that are written between 2 parties so that there is exchange
of sequence of cash flow. And this occurs for a predetermined time period that
is governed by terms and conditions that may include foreign exchange rate and
interest rate payment.
You
will not be able to trade swaps on the exchanges but they are usually traded
over-the counters. Due to the nature of trade occurring not on exchanges but
over the counter, you will find that this market is usually dominated by the
large investment firms and financial institutions. Seldom will you find
individual investors trading swaps.
will not be able to trade swaps on the exchanges but they are usually traded
over-the counters. Due to the nature of trade occurring not on exchanges but
over the counter, you will find that this market is usually dominated by the
large investment firms and financial institutions. Seldom will you find
individual investors trading swaps.
great