Plain Vanilla

Plain Vanilla is a technical term about financial products. It means the most basic or standard version of a financial instrument, options, bonds, futures, swaps. In particular, a plain vanilla option is the standard type of option, whose pricing model was published by Fischer Black and Myron Scholes in 1973. This theory is called "Black-Scholes formula", and anyone who engaged with financial markets knows about it. Moreover, Black-Scholes formula is quite related with partial differential equation, more exactly speaking, by supposing some conditions, a solution of some partial differential equation is expressed with the expectation of some random variables.

The most symple case is a Black-Sholes equation. From Black-Sholes equation, we can get the risk value of option products easily. From this equation, we are able to manage the option as much as our risk reducing. If option traders have done the call option, the first they do is almost "Delta" hedging, that is reducing the risk for underlying changing. Even they can hedge the delta perfectully, they remain the risk for time-values, which is called "Theta". But this risk can be cancelled if they do "Gamma" dealing. Black-Sholes equation is certainly explaining these way.