Hi all,I met a special case which made me confused in deciding whether it is a quanto. In this case, the underlying is in USD, the original notional is in EUR. The payoff is Notional*FX_T*(S_T/S0), in which S_T and S0 are final and initial underlything prices respectively, FX_T is the EUR/USD exchange rate on payment date. Since both the final settlement and underlying are in USD, it seems it's not a quanto; but the actual notional(Notional*FX_T) changes with the exchange rate, which eliminates the FX risk when transforming the payment back to EUR--this is a quanto characteristic. Should I treat this one as a quanto case and take the adjustment into acount in modeling the S_T?Any help is appreciated.Thanks,S

underlying in USD, option price in USD => no quanto adjustment, but take care how you calculate expectation of S_T * FX_T (product of correlated lognormals in USD risk neutral probability).

What is the payoff? If it is [S_eq * S_fx - K]^+, it looks like compo.

I understand properly it is not really compo. Compo would be Spot_USD * USDEUR but here it is Spot_USD * EURUSD = Spot_USD / EURUSD .It seems to be the perf paid on a "floating" notional in USD equal to the USD value of the EUR Notional at maturity.

If you would write down the payoff in full, it may help to understand better.

this looks like a local currency (USD) option settled in a foreign currency (EUR)

Hi Mars,Thanks for your reminding. Currently I use Mento carlo to simulate FX and S process, with the random numbers used in the simulation correlated. Is that OK? Are there any other things special that need attention?Best,S

The full payoff is:at expiration, one can get Notional*FX_T*max((S_T-SX)/S0), 0)S0 is the initial underlying value, which is a fixed number at the beginning of the trade, SX is negotiated, which could be S0 or the minimum underlying value before expiration, or others. QuoteOriginally posted by: AtosIf you would write down the payoff in full, it may help to understand better.

If you simulate FX and S under USD risk neutral measure it will be OK.

Thank you for the reply. As you mentioned it looks like settled in a foreign currency , should it be treated as a quanto case?QuoteOriginally posted by: daveangelthis looks like a local currency (USD) option settled in a foreign currency (EUR)

Hi all,Considerring another case:the underlying is in USD, the original notional is in EUR. The payoff is Notional*max((S_T-SX)/S0), 0) in EUR. This is a standard quanto case. If in the first case when I get the payoff, I immediately transform it into EUR with FX_T, then the actual payoff I get is Notional*FX_T*max((S_T-SX)/S0), 0)/FX_T in EUR, which is totally the same as that in the second case. But the first case is not a quanto, the second is...quite confused! QuoteOriginally posted by: shunvwuHi all,I met a special case which made me confused in deciding whether it is a quanto. In this case, the underlying is in USD, the original notional is in EUR. The payoff is Notional*FX_T*(S_T/S0), in which S_T and S0 are final and initial underlything prices respectively, FX_T is the EUR/USD exchange rate on payment date. Since both the final settlement and underlying are in USD, it seems it's not a quanto; but the actual notional(Notional*FX_T) changes with the exchange rate, which eliminates the FX risk when transforming the payment back to EUR--this is a quanto characteristic. Should I treat this one as a quanto case and take the adjustment into acount in modeling the S_T?Any help is appreciated.Thanks,S

In the first case you want your price in USD, in the second you want your price in EUR. It is not the same risk neutral measure. When you are under EUR risk neutral measure your USD share is quanto, but under USD risk neutral measure it is not.Indeed as you notice the value in EUR of your payoff is a quanto option in EUR and the today value in USD must be the one in EUR multiplied by current FX EUR/USD. If a set of parameters for you model are like B&S for the share and the FX then you can check your price (and your Monte Carlo Implementation).Let us think about compo option with payoff Max( S_T / FX_T -Strike, 0) with your notation FX_T = EURUSD. If you want to do monte carlo simulation of it under EUR risk neutra measure you must simulate S_T quanto and EURUSD quanto!or S_T Quanto and USDEUR.

If you have any payoff p(t) in ccy1, it's npv doesnot change when multiplied by S(t), the value ofone unit in ccy1 in a second currency ccy2, as long asyou have no arbitrage in your model and the paymentis done in the natural currency (and settlement is standard).