Quanto Option
Computes the price of a quanto call: an option on a foreign asset, but whose payoff is paid in domestic currency at a fixed exchange rate. This removes the FX risk for the investor but introduces a drift adjustment that depends on the correlation between the asset and the exchange rate. It's widely used by investors who want exposure to a foreign index without the currency risk. Enter the asset price, the strike, the two rates, the asset and FX volatilities, the correlation, the term and the fixed exchange rate.
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Quanto Option
Computes the price of a quanto call: an option on a foreign asset, but whose payoff is paid in domestic currency at a fixed exchange rate. This removes the FX risk for the investor but introduces a drift adjustment that depends on the correlation between the asset and the exchange rate. It's widely used by investors who want exposure to a foreign index without the currency risk. Enter the asset price, the strike, the two rates, the asset and FX volatilities, the correlation, the term and the fixed exchange rate.
Foreign exposure, without the FX risk
An investor who wants to bet on a foreign index faces two risks at once: the index's and the currency's. The quanto option solves this elegantly. It's an option on the foreign asset, but the payoff is converted to the domestic currency at an exchange rate fixed in advance, completely removing the FX risk.
That embedded hedge isn't free in modeling terms. The correlation between the foreign asset and the exchange rate enters as an adjustment to the asset's drift, the so-called quanto adjustment. If asset and FX move together, the adjustment lowers the forward; if they move opposite, it raises it. It's a subtle detail that changes the price and that many people forget to include.
Enter the foreign asset price, the strike, the domestic and foreign rates, the asset and FX volatilities, the correlation between them, the term and the fixed exchange rate. The tool returns the quanto call premium. Mind the FX quoting convention, which can flip the sign of the correlation term.
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The results provided by this tool are for general informational and educational purposes only and do not constitute professional, financial, medical, legal, tax or accounting advice. Always confirm important decisions with a qualified professional and official sources.