Quanto Option

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Quanto Option

A cash-settled futures contract or other derivative in which the underlying asset is denominated in a currency other than the one in which it is settled. For example, two investors may enter into an agreement to buy/sell a futures contract on an index in which the index is in British pounds but the contract is settled in euros. The exchange rate at which the contract is settled is determined at the beginning of contract, protecting the investors from the foreign exchange risk that the currencies will adversely change in value.
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Quanto options - that is, options on a foreign index with the spot and strike prices denominated in a foreign currency but cash flows taking place at a fixed exchange rate in the domestic currency - have become increasingly popular.[12] Also gaining ground are correlation products in the form of a binary option,[13] where the payoff of the option depends on two underlying variables.