A European investor in the US equity markets wants to buy a quanto call on the S&P
Question:
A European investor in the US equity markets wants to buy a quanto call on the S&P 500 index, where the strike is written in euros. (See the previous question for the definition of a quanto.) Can you explain why the investor wants such an option? Also explain what risks the investor is hedging by buying a quanto call on the equity index rather than a plain call on the S&P 500.
Data in Previous question
A quanto (quantity) option is one in which the option contains price risk from two sources. Quantos are discussed in the chapter on exotic options. An example is where you buy a put option on the Nikkei stock index (which is yen denominated), but the strike price of the option is stated in dollars. Explain what the different sources of risk in such an option might be. For each source of risk, state in which direction it must move for the value of the option to increase.
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