Vanilla Option is a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date). The asset is called the underlying. In other words, call options allow one to buy the underlying at a certain price, so the buyer would want the underlying to go up. Put options allow one to sell the underlying at a certain price, so the buyer would want it to go down. Vanilla options can be of two kinds: European style options and American style options. An American style option is a contract that may be exercised at any time between the date of purchase and the expiration date. A European style option does not give any right for early exercise.
Exotic Option may include various knockout, amortizing and cancellable features, in addition to the vanilla structure. The following is the list of the most popular exotic options: knockout, window knockout, double knockout, baseball option, fadeout, basket option, Bermudan option, Asian option, installment swap, swaption.
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