Chapter 11 - Forward Quanto

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Chapter 11 - Forward Quanto

Postby robert_t » Fri May 09, 2014 2:22 am

hi mark,

looking at section 11.7 Quanto options, the value of the quanto forward in this section is noted as:

e^{-rT} E [ M_T - K ]

However, if we want the payoff in sterling, why don't we multiply by the exchange rate F_T? That is, why isn't the value:

e^{-rT} E [ F_T (M_T - K ) ]

regards,
a former student who apparently got the quanto question right in the final exam
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Re: Chapter 11 - Forward Quanto

Postby mj » Wed May 14, 2014 5:25 am

I don.t really get your question.

M_T is a dollar amount. But we receive M_T - K pounds. I don't see what
F_T(M_T-K) has to do with it.
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Re: Chapter 11 - Forward Quanto

Postby robert_t » Wed May 14, 2014 11:21 pm

isn't F_T (M_T - K ) the amount we receive in pounds at time T?

if M_T is a dollar amount... to convert this into pounds at time T don't we have to multiply by F_T ?
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Re: Chapter 11 - Forward Quanto

Postby mj » Wed May 14, 2014 11:40 pm

the contract says that you convert it at a rate of one to one
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