A US-based investor buys from you a quanto option in which the payoffs from a euro-denominated call on a German company are converted back into US dollars at the fixed rate of $1.25/€. To hedge this transaction
A) You must hedge both exchange rate and equity price risk.
B) You must hedge equity price risk but there is no exchange rate risk.
C) You must hedge exchange rate risk but there is no equity price risk.
D) There is nothing you need to do.

Question

Quizplus · Accepted Answer

You must hedge both exchange rate and equity price risk because the payoff is in euros and the investor wants to receive US dollars.

A US-Based Investor Buys from You a Quanto Option in Which