what is a quantity adjusting option quanto option 
a quantity adjusting option commonly called a quanto option is a cross currency derivative in which the underlying asset is denominated in one currency but settlement is made in another currency at a predetermined exchange rate another name for these options is a guaranteed exchange rate option quanto options come in both call and put varieties understanding the quanto optionquantity adjusting options get their name from their potential currency forward nature with a variable notional or abstract amount hence the term quantity adjusted or quanto for short investors use quantos when they believe that a particular asset will do well in a country but fear that the country s currency will not perform as well thus the investor will buy an option in the foreign asset while keeping the payout in the home currency the quanto option is a type of exotic option these are customizable transactions and are normally traded over the counter rather than on an exchange benefits of quanto optionsall financial markets are volatile and currency markets are not immune a u s based investor who invests directly in a foreign stock index for example is exposed to the risk that the foreign index will underperform and the risk that the currency will fluctuate in the wrong direction at worst both could happen quantos are settled at a fixed rate of exchange that shelters the investor from exchange rate risk at the time of expiration the option s value is calculated in the foreign currency and then converted at a fixed rate into the domestic currency the quanto option removes currency risk for overseas investors that increases investor confidence and encourages investment in smaller or riskier markets both the strike price and the underlying asset are valued in the foreign currency at the time of exercise calculation of the option s intrinsic value is in the foreign currency this foreign currency value is converted to the investor s domestic currency at the fixed exchange rate 12types of quanto optionsquantos are in most ways identical to traditional equity options the critical difference is that they are purchased in the investor s domestic currency but denominated in the asset s foreign currency at inception the quanto contract fixes the exchange rate between the two currencies this fixed exchange rate remains in force for the duration of the contract there are variations on quantity adjusting options contracts one is the nikkei 225 which is traded on the chicago mercantile exchange cme group the underlying asset for the futures contract is the nikkei 225 stock index the contract is settled in u s dollars rather than in japanese yen 3there are also quanto swaps available in a swap one of the counterparties pays a foreign interest rate to the other party while the notional amount is in the domestic currency derivatives with quanto features are common due to their ability to protect the international investor from currency price swings they may be found in futures forwards vanilla options and exotic notes 4