Which of the following is most likely the underlying of a plain vanilla interest rate swap?
A is correct. In a plain vanilla interest rate swap, an interest rate, such as Libor, serves as the underlying. A plain vanilla interest rate swap is one of many derivatives in which a rate, not the instrument that pays the rate, is the underlying.
How does a vanilla interest rate swap work?
A vanilla interest rate swap is a contract to exchange cash flows for a period of time, based upon a principal amount where one cash flow is calculated with a floating interest rate and the other is calculated with a fixed interest rate index.
What is plain vanilla derivatives?
Plain vanilla. A term that refers to a relatively simple derivative financial instrument, usually a swap or other derivative that is issued with standard features.
What is a plain vanilla swap?
Plain Vanilla Interest Rate Swap is an agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for another based on a specified principal amount.
What is meant by vanilla swap?
The term plain vanilla swap is most commonly used to describe an interest rate swap in which a floating interest rate is exchanged for a fixed rate or vice versa.
What are vanilla trades?
A vanilla option is a call option or put option that has no special or unusual features. Such options are standardized if traded on an exchange such as the Chicago Board Options Exchange.
What are vanilla swaps?
What is a swap in commodities?
A commodity swap is a type of derivative contract where two parties agree to exchange cash flows dependent on the price of an underlying commodity. A commodity swap is usually used to hedge against price swings in the market for a commodity, such as oil and livestock.
How does a commodity swap work?
How is a currency swap different from a plain vanilla interest rate swap?
Plain Vanilla Foreign Currency Swap Unlike an interest rate swap, the parties to a currency swap will exchange principal amounts at the beginning and end of the swap. The two specified principal amounts are set so as to be approximately equal to one another, given the exchange rate at the time the swap is initiated.
A plain vanilla swap is one of the simplest financial instruments contracted in the over-the-counter market between two private parties, both of which are usually firms or financial institutions. There are several types of plain vanilla swaps, including an interest rate swap, commodity swap, and a foreign currency swap.
What are the benefits of switching to plain vanilla interest rate swaps?
There may be increased financial benefit in switching to newly available or alternative cash flow streams. The need may arise to hedge or mitigate risk associated with a floating rate loan repayment. The most popular types of swaps are plain vanilla interest rate swaps.
What is a plain vanilla exchange rate?
This is an exchange of interest rates on certain cash flows and is used to speculate on changes in interest rates. There are also plain vanilla commodity swaps and plain vanilla foreign currency swaps. In the financial world, the opposite of plain vanilla is exotic.
What is plain vanilla trading?
What Is Plain Vanilla? 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 .