Glossary

A vanilla currency option is a financial derivative instrument that gives the buyer the right —but not the obligation— to buy (in a ‘call’ option), or to sell (in a ‘put’ option) the contracted currency at a set price or exchange rate (known as the ‘strike price’), on a predetermined expiration date. The seller of the option must fulfill the contract if the buyer so desires. The term ‘vanilla’ or ‘plain vanilla’ is used to signify that the contract has no other special features that would turn it into an ‘exotic’ option. When hedging regular foreign currency inflows and outflows, forward contracts are more widely used than options. However, vanilla currency options can be an efficient tool when contingent business events are hedged.