Quantity Adjusting Option (QUANTO)

(1) A fixed exchange rate foreign equity option in which the face amount of the currency coverage expands or contracts to cover changes in the foreign currency value of a designated underlying security or package of securities. Quantos are used to adjust the investor's base currency protection on an underlying position which varies in value in the non-base currency. The most common example is a cross-border, equity-linked instrument with currency protection on the value of the foreign equity position in the domestic currency. Compare with Equity- Linked Foreign Exchange (Elf-X) Option (diagrams). Also called Fixed Exchange Rate Foreign Equity Option. See also Secondary Currency Option, Omega (2), Omega Risk (1), Complex Option, Guaranteed Exchange Rate Warrant, Guaranteed Exchange Rate Option, Quanto Note (diagram). (2) An option on a percentage change in a currency pair ratio applied to a face amount denominated in a third (base) currency. Double and triple currency QUANTOS combine or offset percentage changes in two or three currency pair ratios, none involving the base currency. One similarity of the equity and currency QUANTOs lies in the difficulty of estimating or hedging the value of the exchange into the base currency. Also called Currency Quantity Adjusting Option (Currency QUANTO).

Glossary * Q