A type of FX option whose payoff is determined based on a contractually agreed exchange rate and the difference between the sport price (spot exchange rate) at expiration and the strike price. The payoff for a quantoed call option (per unit of underlying rate) is given by:
Payoffcall = FXfixed × max [S -X, 0]
Where: FXfixed is the pre-agreed exchange rate, S is the spot price at expiration, and X is the option’s strike price.
By the same token, the payoff for a quantoed put option (per unit of underlying rate) would be given by:
Payoffput = FXfixed × max [X -S, 0]
Quantoed options can be calls or puts, plain vanilla options or exotic options.
Quantoed options are also known as quanto options.
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