Original Vanilla

What is plain vanilla?

Regular editions are the most basic or standard versions of financial instruments, usually options, bonds, futures, and swaps. It is the opposite of exotic instruments, which alter the components of traditional financial instruments, resulting in more complex securities.

key takeaways

  • Plain vanilla is the most basic version of a financial instrument with no special features.
  • Options, bonds, other financial instruments, and economic mindsets can be mundane.
  • Common vanilla is associated with lower risk, while exotic tools are associated with higher risk.
  • After the 2007 financial crisis, the need for commonplace tactics led to the Dodd-Frank Wall Street reform and consumer protection laws.

Learn about common vanilla

Plain vanilla describes an asset or financial instrument in its simplest form. No frills, no extras, and it can be applied to categories like options or bonds.

Plain vanilla can also be used to describe broader financial concepts, such as trading strategies or economic thinking patterns. For example, a normal vanilla card is a credit card with simply defined terms. Ordinary ordinary debt comes with fixed-rate borrowing and no other features, so the borrower has no conversion rights.

A common method of financing is called a common strategy. The cry came after the 2007 recession, when risky mortgages caused the housing market to crash. During the Obama administration, many pushed for regulators to encourage easy ways to finance mortgages, which stipulated — among other principles — that lenders must provide customers with standardized, low-risk mortgages.

common vanilla instrument

Ordinary options give the holder the right to buy or sell the underlying asset at a predetermined price within a specific time frame. There are no special terms or features for this call or put option. It has a simple expiration date and strike price. Investors and companies will use them to hedge asset exposures or speculate on asset price movements.

Ordinary ordinary swaps can include ordinary ordinary interest rate swaps, in which two parties enter into an agreement in which one party agrees to pay a fixed interest rate for a certain amount on a specific date and for a specific period of time. The counterparty pays the first party at a floating rate over the same period. This is an interest rate exchange for certain cash flows, used to speculate on changes in interest rates. There are also common commodity swaps and common foreign currency swaps.

Common Vanilla vs Exotic

In the financial world, the opposite of plain vanilla is exotic. Therefore, exotic options involve more complex features or special cases that distinguish them from the more common American or European style options. Exotic options are associated with more risk because they require a deep understanding of financial markets to execute them correctly or successfully, so they are over-the-counter (OTC).

Examples of exotic options include binary or digital options with different payouts. Under certain terms, they offer a final one-time payment, rather than incremental payments that increase as the price of the underlying asset rises. Other exotic options include Bermuda options and volume adjustment options.

Original Vanilla and Dodd-Frank

After the 2007 global financial crisis, there was a push for a safer and fairer financial system. This is reflected in the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which also led to the creation of the Consumer Financial Protection Bureau (CFPB). The CFPB implements consumer risk protection in part by regulating financing options that require a common approach.

In 2018, President Donald Trump signed a bill that eased some restrictions on all banks in the country except those considered the largest. That includes raising the threshold at which they are deemed too important to fail from $50 billion to $250 billion and allowing the agencies to waive any stress tests. The CFPB has also been stripped of some powers, particularly to enforce cases involving discriminatory lending practices.

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