Quanto Option

A quanto option is an exotic cross-currency derivative where the underlying asset is denominated in one currency but the payoff is settled in a different currency at a fixed exchange rate. This eliminates currency risk for the option buyer while retaining exposure to the underlying asset's price movements. For example, an Indian investor purchasing a quanto call option on the S&P 500 would receive the payoff in Indian rupees at a pre-agreed USD/INR rate, regardless of how the exchange rate moves. Quanto options are used by international investors who want equity or commodity exposure in foreign markets without taking on foreign exchange risk. They are complex, OTC instruments primarily accessed by institutional and sophisticated investors in India.