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R: Data Analysis and Visualization by Ágnes Vidovics-Dancs, Kata Váradi, Tamás Vadász, Ágnes Tuza, Balázs Árpád Szucs, Julia Molnár, Péter Medvegyev, Balázs Márkus, István Margitai, Péter Juhász, Dániel Havran, Gergely Gabler, Barbara Dömötör, Gergely Daróczi, Ádám Banai, Milán Badics, Ferenc Illés, Edina Berlinger, Bater Makhabel, Hrishi V. Mittal, Jaynal Abedin, Brett Lantz, Tony Fischetti

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Quanto options

The term "quanto" is the abbreviation of quantity adjusting option. The payoff of quanto derivatives is determined by an asset denominated in one currency, but is paid in another currency.

The best way to understand a quanto product (or any kind of derivative) is to examine its payoff function. It is well known that assuming the underlying asset is a stock that pays no dividend, the payoff of a European call option is as follows:

Quanto options

Here, SA is the price of the stock and X is the strike price. Here, c, SAT, and X are denominated in the same currency; let's call it domestic currency.

The payoff of a European call quanto is as follows:

Here, ...

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