A quanto option is sometimes called a "wrong-currency" option because the payoffs of the quanto
A) Are in a different currency from the premium.
B) Are computed by converting the payoffs from an underlying option in a foreign currency option back to the home currency at a pre-specified exchange rate that may be unrelated to the actual exchange rate.
C) Are in a different currency from the investor's home currency.
D) Are computed by converting the payoffs from an underlying home-currency option into a foreign currency at the current exchange rate.

Question

Quizplus · Accepted Answer

A quanto option is one that involves a foreign underlying asset and a foreign currency. However, the payoff of the option is in the investor's home currency. Therefore, the payoffs are computed by converting the payoffs from an underlying option in a foreign currency option back to the home currency at a pre-specified exchange rate that may be unrelated to the actual exchange rate. This is why it is sometimes referred to as a "wrong-currency" option.

A Quanto Option Is Sometimes Called a "Wrong-Currency" Option Because