What Is Plain Vanilla in Finance?

Plain vanilla is🔯 the most basic or standard version of a financial instrument, usually options, bonds, futures, and swaps. It is the opposite of an exotic instrument, which alters the components of a traditional financial instrument, resulting in a more complex security.

Understanding Plain Vanilla

Plain vanilla describes the simplest form of an asset or financial instrument. There ar𒊎e n🤡o frills, no extras, and it can be applied to categories such as options or bonds.

Plain vanilla can also be used to describe more generalized financial concepts, such as trading strategies or modes of thinking in economics. For example, a 澳洲幸运5官方开奖结果体彩网:plain vanilla card&n♛bsp;is a credit card with simply defined terms. Plain vanilla debt comes with fixed-rate borrowing and no other features, so the borrower has no convertibility rights.

A plain-vanilla approach to financing is called a 澳洲幸运5官方开奖结果体彩网:vanilla strategy. Calls for this came after the 澳洲幸运5官方开奖结果体彩网:2007 economic recession when risky mortga🧸ges contributed to the housing market collapse. During the Obama administration, many pushed for a regulatory agency to incentivize a plain vanilla approach to financing mortgages, stipulating­—among other tenets—that lenders would have to offer standardized, low-risk mortgages to customers.

Plain Vanilla Instruments

A 澳洲幸运5官方开奖结果体彩网:vanilla option gives the holder the right to buy or sell the underlying asset at a predetermined price within a specific timeframe. This call or put option comes with no special terms or features. It has a simple expiration date and 澳洲幸运5官方开奖结果体彩网:strike price. Investors and companies w🎃ill use them to hedge their exposure to an asset or to speculate on an asset's price movement.

A 澳洲幸运5官方开奖结果体彩网:plain vanilla swap can include a plain vanilla interest rate swap in which two parties enter into an agr♑eement where one party agrees to pay a fixed rate of interest on a certain 💯dollar amount on specified dates and for a specified time period.

The counterparty makes payments on a 澳洲幸运5官方开奖结果体彩网:floating interest rate to the first party for the same period of time. This is an exchange of interest rates on certain cash flows and is used to speculate on changes in interest r🧜ates. There are also plain vanilla commodity swaps and plain vanilla foreign currency swaps.

Plain Vanilla vs. Exotic Options

In the financial world, the opposite of plain vanilla is exotic. So an 澳洲幸运5官方开奖结果体彩网:exotic option involves much more complicated features or special circumstances that separate them f💜rom the more common American or European options.

Exotic options are associated with more risk as they require an advanced understanding of financial markets in order to execute them correctly or successfully, and as such, they trade 澳洲幸运5官方开奖结果体彩网:over-the-counter (OTC).

Examples of exotic options include binary or digital options, in which the payout methods differ. Under certain terms, they offer a final lump sum payout rather than a payout that increases incrementally as the underlying asset’s price rises. Other exotic options include 澳洲幸运5官方开奖结果体彩网:Bermuda options and 澳洲幸运5官方开奖结果体彩网:quantity-adjusting options.

Plain Vanilla and Dodd-Frank

There was a push to make the financial system safer and fairer in the wake of the 2007 global financial crisis. This was reflected in the passing of the Dodd-Frank Wall Street Reform and C𝓡onsumer Prote♌ction Act in 2010, which also enabled the creation of the 澳洲幸运🌳5官方开奖结果体彩网:Consumer Financial Protectio🌳n Bureau (CFPB). The CFPB enforces consumer risk protection in part by regulating financing options that call for a plain-vanilla approach.

In 2018, President Donald Trump signed a bill easing back some of the restrictions on all of the nation's banks except those considered to be the largest. This included raising the threshold at which they are deemed too important to fail from $50 billion to $250 billion and allowing the institutions to forgo any 澳洲幸运5官方开奖结果体彩网:stress tests. The CFPB was also stripped of some of its power, notably its enforcement of cases involving discriminatory lending practices.

The Bottom Line

Plain vani🌃lla refers to the most simple, standard, and basic financial instruments and strategies. These instruments or strategies are straightforward and generally less risky when compared with their exotic counterparts; instruments or strategies that have been altered in a way that is intended to bring higher returns.