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Quantity-Adjusting Option (Quanto Option)

What is 'Quantity-Adjusting Option - Quanto Option'

A cash-settled, cross-currency derivative in which the underlying asset is denominated in a currency other than the currency in which the option is settled. Quantos are settled at a fixed rate of exchange, providing investors with shelter from exchange-rate risk. At the time of expiration, the option's value is calculated in the amount of foreign currency and then converted at a fixed rate into the domestic currency.

Explaining 'Quantity-Adjusting Option - Quanto Option'

The CME Nikkei 225 is an example of a quanto. It is a futures contract for which the underlying asset - in this case, the Nikkei 225 Stock Average Index - is settled in U.S. dollars, as opposed to Japanese yen.

Investors use quantos when they believe that a security will do well in another country but fear that country's currency will not. Thus, investors buy an option in the foreign stock while keeping the payout in their home currency.


Further Reading


Quantity-adjusting options and forward contracts
papers.ssrn.com [PDF]
… would not view the model for a call option spread (in a Black—Scholes economy) as a … is a QAF and can be neither priced nor hedged using Fischer or Stulz options.I3 Case … but with optionality on the currency instead of on the stock, consider a quantity—adjusting option to sell …

Quanto European Option Pricing With Ambiguous Return Rates and VolatilitiesQuanto European Option Pricing With Ambiguous Return Rates and Volatilities
ieeexplore.ieee.org [PDF]
… would not view the model for a call option spread (in a Black—Scholes economy) as a … is a QAF and can be neither priced nor hedged using Fischer or Stulz options.I3 Case … but with optionality on the currency instead of on the stock, consider a quantity—adjusting option to sell …

Model based Monte Carlo pricing of energy and temperature Quanto optionsModel based Monte Carlo pricing of energy and temperature Quanto options
www.sciencedirect.com [PDF]
… would not view the model for a call option spread (in a Black—Scholes economy) as a … is a QAF and can be neither priced nor hedged using Fischer or Stulz options.I3 Case … but with optionality on the currency instead of on the stock, consider a quantity—adjusting option to sell …

A versatile approach for stochastic correlation using hyperbolic functionsA versatile approach for stochastic correlation using hyperbolic functions
www.tandfonline.com [PDF]
… would not view the model for a call option spread (in a Black—Scholes economy) as a … is a QAF and can be neither priced nor hedged using Fischer or Stulz options.I3 Case … but with optionality on the currency instead of on the stock, consider a quantity—adjusting option to sell …

Pricing and hedging quanto options in energy marketsPricing and hedging quanto options in energy markets
papers.ssrn.com [PDF]
… would not view the model for a call option spread (in a Black—Scholes economy) as a … is a QAF and can be neither priced nor hedged using Fischer or Stulz options.I3 Case … but with optionality on the currency instead of on the stock, consider a quantity—adjusting option to sell …

Generalized put-Call parityGeneralized put-Call parity
papers.ssrn.com [PDF]
… would not view the model for a call option spread (in a Black—Scholes economy) as a … is a QAF and can be neither priced nor hedged using Fischer or Stulz options.I3 Case … but with optionality on the currency instead of on the stock, consider a quantity—adjusting option to sell …

Cross market price support and agricultural developmentCross market price support and agricultural development
www.emerald.com [PDF]
… would not view the model for a call option spread (in a Black—Scholes economy) as a … is a QAF and can be neither priced nor hedged using Fischer or Stulz options.I3 Case … but with optionality on the currency instead of on the stock, consider a quantity—adjusting option to sell …

The Incremental Expected Shortfall-Based Pricing: Application to a Cost-Effective Hedge of an Electricity Price-Volume Quanto RiskThe Incremental Expected Shortfall-Based Pricing: Application to a Cost-Effective Hedge of an Electricity Price-Volume Quanto Risk
papers.ssrn.com [PDF]
… would not view the model for a call option spread (in a Black—Scholes economy) as a … is a QAF and can be neither priced nor hedged using Fischer or Stulz options.I3 Case … but with optionality on the currency instead of on the stock, consider a quantity—adjusting option to sell …


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