Introduction

The quanto option is designed for investors who: 

- want to execute an option strategy on a foreign stock

- are only interested in the % return of that strategy

- want to get paid this return in their own currency

 

Basic principle --> NO FX rate exposure

The FX rate will be fixed to the prevailing FX rate at inception of the option transaction and the payout of the quanto option will be this FX rate times the payouf of the regular option. 

 

Example: 

US investor is long 1Y call on British Petroleum (GBP). He wants to get his return in USD. 

Assume BP = 5£. FX rate (investor/foreign) = 2 USD/GBP. In 1Y BP = 5.5£. 

 

Payout at maturity of the quanto ATM call option --> 1$ regardless of the change in the FX rate. 

BP's share has increased by 10% --> US investor expects a 10% return on his USD investement. 

 

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