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Derivatives

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Synthetic Quanto Spread

A quanto spread that is constructed using two forward rates. It is mainly used to hedge quanto risk in the interdealer market.

This spread can be expressed as the difference between two positions (spot, forward), using options (calls and puts):

[call(S)D – put(S)D – [call(S)F – put(S)F]

Where:

S: is an underlying stock priced in foreign currency or a foreign index.

D: denomination in the domestic currency; F: denomination in a foreign currency.


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