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Quanto Forward
Hi,Suppose I am long a quanto forward (assuming constant correlation), how should I hedge this forward position? The part that I am puzzled is how to hedge the fx risk. Could someone please give me some help on this?Thanks
Quanto Forward
The risks to be hedged are the following:
1) the Index
2) volatility of index
3) volatility of FX
4) and finally the fx risk
to hedge the quanto the fist hedge to be set up is buy/sell the index. This will lead to the fx risk which would give an exposure equivalent to the MTM of the hedge as the hedge currency and payoff currency are different.
The fx exposure is pretty much dynamic and has to be frequently rebalanced.
for detailed treatment refer to "Hedging Quantos" by F Jamshidian.
Pauls tome(s) on derivatives is(are) also quite helful.
Cheers
1) the Index
2) volatility of index
3) volatility of FX
4) and finally the fx risk
to hedge the quanto the fist hedge to be set up is buy/sell the index. This will lead to the fx risk which would give an exposure equivalent to the MTM of the hedge as the hedge currency and payoff currency are different.
The fx exposure is pretty much dynamic and has to be frequently rebalanced.
for detailed treatment refer to "Hedging Quantos" by F Jamshidian.
Pauls tome(s) on derivatives is(are) also quite helful.
Cheers