What Are The Difference Between Vanilla And Exotic Options?

Forex options trading has come a long way since it started. Before, transaction can only be done over the counter (OTC). Today, that is no longer the norm. While OTC dealings still exist, the more common way to do forex trading including currency options trading is via the internet with the use of laptops and computers as well as through telephones/cellular phones.

Currency options trading is only one of the many types of financial market trading styles done in the huge world called the Foreign Exchange market. Forex has indeed been the largest financial market worldwide and has been like that for decades. At present, billions of dollars are traded in it every single day. In forex options trading, two basic types of options are traded and given the aliases, Vanilla options and Exotic options.

The informal but commonly used terminology assigned to a standard option of any financial tool, not only currency option, is Vanilla Option or just Vanilla. If the word “vanilla” is placed before “option”, then that particular option is the standard type of option that involves only the simplest meaning of options, that which involves the strike price and the expiration date. Vanilla options in forex are defined as the buying and selling of either a standard call option or a standard put option. Since there are more complex options, the term vanilla allows the trader to recognize immediately that the option at hand is just the standard one.

On the other hand, the Exotic options are more complex in structure. This type is commonly transacted over the counter. If in Vanilla option, the date, price and payout structure are precise and specific, in exotic option, one or all of these features may vary. This is due to the fact that this option is tailored by the broker according to the requirements of the trader.

Source by Timothy Stevens

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