Quanto option


It is that variable notional amount that give quantos their name—"quanto" is short for "quantity adjusting option. Quantos are quanto option because they shield the purchaser from exchange rate fluctuations. In order to write the dynamics of the modeled financial variables under foreign currency pricing measure one has to apply Girsanov theorem leading to a drift term which depends on its volatility, the FX rate quanto option FX rate quanto option the pricing currency and the modeled variable currency and correlation between both. This situation typically quanto option if the weather is hotter colder than expected and a substantial number of households turn on the airconditioning heating. Views Read Edit View history.

For example, a swap in which the notional amount is denominated quanto option Canadian dollarsbut where the floating rate is set as USD LIBORwould be considered a quanto swap. For example, a swap in which the notional amount is denominated quanto option Canadian dollarsbut where the floating rate is set as USD LIBORwould be considered a quanto swap. Pricing quanto derivatives involves modeling financial variables stocks, interest rates quanto option.

Pricing quanto derivatives involves modeling financial variables stocks, interest rates etc. This situation typically occurs if the weather is hotter colder than expected and quanto option substantial number of households turn on the airconditioning heating. Quantos are attractive because they shield the purchaser from exchange rate fluctuations. It is that variable notional amount that give quantos their name—"quanto" is quanto option for "quantity adjusting option.

It is that variable notional amount that give quantos their name—"quanto" quanto option short for "quantity adjusting option. For example, a quanto call holder would have the right to buy a foreign stock and convert its payoff into local currency at a predetermined exchange rate. Buying a quanto allows the retailer to hedge against that risk. Buying a quanto allows the retailer to hedge quanto option that risk.

Quanto optionsin which the difference between the underlying and a fixed strike price is paid out in another currency. In order to write the dynamics of the quanto option financial variables under foreign currency pricing measure one has to apply Girsanov theorem leading to a drift term which depends on its volatility, the FX rate volatility Quanto option rate between the pricing currency and the modeled variable currency and correlation between both. Such products are attractive for speculators and investors who wish to have exposure to a foreign asset, but without the corresponding quanto option rate risk. In fact, this kind of options is usually used when investors are quanto option of the underlying asset's performance, but are skeptic or unsure about the performance of the currency in which the underlying asset is denominated.

Quanto optionsin which the difference between the underlying and a fixed strike price is paid out in another currency. A typical example of a buyer of a Quanto is a retailer in a liberalized electricity market, with a customer base to which they deliver to a fixed contracted price. This situation typically occurs if the weather is hotter quanto option than expected and a substantial number of households turn on the quanto option heating. Quanto options have both the strike price and underlier denominated in the foreign currency.

For example, a swap in which the notional amount is denominated in Canadian dollarsbut where the floating rate is set as USD LIBORwould be considered a quanto swap. Quanto futures contractssuch as a futures contract on a European stock quanto option index quanto option is settled in US dollars. In pricing this type of options, in addition to the main factors used as inputs in option pricing modelsthe exchange rate quanto option be determined in the contract and taken into account in price computation.