Quanto
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A quanto is a type of derivative in which the underlying is denominated in one currency, but the instrument itself is settled in another currency at some fixed rate. Such products are attractive for speculators and investors who wish to have exposure to a foreign asset, but without the corresponding exchange rate risk.
Common types of quanto include :
- Quanto futures contracts, such as a futures contract on a European stock market index which is settled in US dollars.
- Quanto options, in which the difference between the underlying and a fixed strike price is paid out in another currency.
- Quanto swaps, in which one counterparty pays a non-local interest rate to the other, but the notional amount is in local currency. The second party may be paying a fixed or floating rate. For example, a swap in which the notional amount is denominated in Canadian dollars, but where the floating rate is set as USD LIBOR, would be considered a quanto swap.
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