Quantity-Adjusting Option - Quanto Option

AAA

DEFINITION of '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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Forward Contract

    A customized contract between two parties to buy or sell an asset ...
  2. Currency Forward

    A binding contract in the foreign exchange market that locks ...
  3. Equity Linked Foreign Exchange ...

    A put or call option that protects an investor from foreign-exchange ...
  4. Forex - FX

    The market in which currencies are traded. The forex market is ...
  5. Forward Price

    The predetermined delivery price for an underlying commodity, ...
  6. Exotic Option

    An option that differs from common American or European options ...
RELATED FAQS
  1. What's the difference between a regular option and an exotic option?

    Before learning about exotic options, you should have a fairly good understanding of regular options. Both types of options ... Read Full Answer >>
Related Articles
  1. Forex Education

    Getting Started In Foreign Exchange Futures

    Learn how these futures are used for hedging and speculating, and how they are different from traditional futures.
  2. Options & Futures

    Options On Futures: A World Of Potential Profit

    There's one simple hurdle in the transition from stock to futures options: learning about product specifications.
  3. Options & Futures

    Forecast The FX Market With The COT Report

    Three empirical findings on futures data can help currency traders determine buy and sell points.
  4. Options & Futures

    Examples Of Exchange-Traded Derivatives

    We look at some of the most common exchange-traded derivatives.
  5. Options & Futures

    Advantages Of Trading Futures Over Stocks

    We look at the top eight advantages of trading futures over stocks.
  6. Options & Futures

    Top Brokers Offering Tools For Covered Calls

    Here are the brokers that offer the best tools for investors and traders to write covered calls and covered puts.
  7. Economics

    Effects of OIS Discounting for Derivative Traders

    The use of OIS discounting has important implications for derivative valuations and could positively or negatively impact a trader's profit or loss.
  8. Options & Futures

    Why Trading Coffee Futures Is A Zero Sum Game

    Coffee futures trading is as close to a zero-sum game as you might find in investing. We look at the risks and rewards.
  9. Options & Futures

    The Perks of Trading Coffee Options

    As more people begin to trade coffee, we explain how coffee options work, who uses them, what drives valuations, and the risks and rewards.
  10. Trading Strategies

    Top Day Trading Instruments

    Day trading is an intense and often appealing activity. Investopedia provides the list of top financial instruments for day trading.

You May Also Like

Hot Definitions
  1. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  2. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  3. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  4. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  5. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  6. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
Trading Center