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Derivatives

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  • July 3, 2020
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Quanto Risk

A type of market risk that arises from unfavorable changes in the correlation between the price of an asset underlying a quanto option and the volatility of the applicable exchange rate. This correlation affects the price of a quanto option, but it is quite difficult to price the actual effect. Therefore, investors usually use realized correlation plus a “guesstimated” margin, i.e., one based on both estimation and judgment.


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