Understanding pricing and market potential of quanto (Qauntity-adjusted) derivatives

Abstract

This project will look at a relatively new class of exotic derivatives: Quanto derivatives. These are being used more and more for hedging currency risk. The report will begin with an introduction to Quanto options, including the rationale behind their existence and thus, choice as a topic of study. Thereafter, the term sheet of a practically used option is detailed. Further, the structuring and pricing of the derivative is looked at, with a keen eye on it’s hedging. This is followed by the pricing of an option on the Sensex, along with the sensitivity analysis of the price with various parameters. Finally, Quanto notes are discussed that can be sold to foreign investors having both bearish as well as bullish views on the market.