Definition (1):
Plain vanilla swap refers to a fixed-floating swap, fixed-rate payments are periodically exchanged for floating-rate payments. When using this swap, consider the exchange of payments under different interest rates. Although infinite possible interest rates exist,
only two are considered:
- A constant increase in market rates and
- A constant fall in market interest rates.
Definition (2):
A plain vanilla swap is a simple financial instrument traded between two financial institutions or firms in the over-the-counter market. This swap can be of several types such as an interest rate swap, a foreign currency swap, and a commodity swap. The mentioned term is most commonly applied for describing an interest rate swap where a fixed rate is exchanged for a floating interest rate or vice versa.
Definition (3):
A plain vanilla swap is also called a generic swap. It is the most basic type of financial derivative product helping institutions and firms manage risk. It is an agreement between two private parties specifying a periodic cash flows’ exchange arising from a debt instrument or an asset class.
Corporations, institutions, and high valued investors are the most common traders of these swaps. Generally, this type of transaction is performed in connection to the following assets:
- Interest rates
- Currencies
- Commodities