An option in which a predetermined exchange rate is applied to convert the final settlement value of the option into the holder’s domestic currency. Thanks to this option, the holder receives foreign market returns in his domestic currency, whereby avoiding the adverse effect of fluctuations in exchange rates on his returns. For instance, assume a Japanese investor is bullish on the American equity market but concerned about the dollar appreciating against the yen. This investor will need to buy a call option on a certain American equity index. The option pays in Japanese yen the value of that index in a specific period of time (the option’s life) minus the exercise price.
This option is also known as a quanto option.
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