Explain the Term ‘Quanto’ Options and How They Can Affect the Perceived Delta

Quanto options are a type of derivative where the underlying asset is denominated in one currency, but the option's payoff is settled in a different, fixed currency at a predetermined exchange rate. This structure eliminates the foreign exchange risk for the investor.

The perceived Delta of a Quanto option is affected because the volatility of the exchange rate is implicitly incorporated into the pricing, often reducing the Delta compared to a standard option on the same underlying asset.