Quanto adjustment
Definition · Level 12 · Exotics & structured
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The change to a foreign asset’s forward when its payoff is converted at a fixed rate: forward × e^(−ρ·σS·σFX·T). Positive correlation lowers it (calls cheaper, puts more expensive); negative correlation raises it.
Example
Forward 30,000, ρ = +0.3, volatilities 20% and 10%, one year → about 29,820.
Where Tradecraft teaches it
Level 12 · Exotics & structured, in the lesson “Quantos & variance swaps”: Two ways to isolate one risk: a foreign asset without its currency, and volatility on its own.
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