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How Currency and Venue Can Differ for Options on an Underlying

Article Quant Q&A · Author: s5s
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Summary

The document explains that an option’s trading currency and venue do not necessarily match those of its underlying. It introduces quanto options, whose payoff is denominated in a different currency, and contrasts them with compo structures that retain foreign exchange exposure through the premium or settlement arrangement. Examples include options and futures linked to emerging-market indices and Nikkei contracts offered in different currencies and venues.

The examples show that contract specifications determine the currency exposure and settlement mechanics; the underlying alone does not establish them. For instance, the text describes a USD value per index point for certain contracts as avoiding direct exposure to the local currency exchange rate, while other structures preserve FX exposure. It also mentions the possibility of bespoke over-the-counter contracts, but does not identify a listed example for one proposed structure. The examples are illustrative rather than a complete survey, so actual venue, currency, and settlement terms must be checked contract by contract.

Key ideas

  • An option’s currency and exchange are not automatically inherited from its underlying.
  • Quanto structures denominate payoff in a currency different from the underlying market’s currency.
  • Compo structures can retain foreign exchange exposure through their premium or settlement terms.
  • Contract specifications determine index point values, settlement currency, and associated currency risk.
  • The examples are illustrative, and listed contract details need individual verification.

Tags

OptionsFuturesForexDerivatives pricing
Full text
# Do option contracts inherit the currency and exchange of the underlying?


# Do option contracts inherit the currency and exchange of the underlying?












Given an underlying (e.g. future or an index), would options on that underlying trade in the same currency and on the same exchange?

For example, options on FTSE100 index itself would trade in GBP on a particular exchange. Options on SPX500 futures will trade on CME in USD?

## Answer by Lliane (score 2, accepted)

https://quant.stackexchange.com/a/42827

A quanto option is an option where the payoff will be denominated (and usually paid) in a different currency.

For emerging markets, options are often denominated in a non-convertible currency (KRW, INR, TWD). For the Kospi denominated in KRW, you have futures on KRW denominated options in Eurex (cash settled in EUR), this is called a Compo option (you have a EUR/KRW fx exposure on the premium).

For INR and TWD, you have futures on INR/TWD denominated indexes (nifty/msci tw) traded, in that case 1 point of the index has a US dollar value, this is a Quanto future/option (you don't have any USD/TWD or USD/INR fx exposure).

An other example for futures would be NIKKEI, futures are available in JPY on SGX/JPX/CME. They are also available in USD on CME (no USD options however).

Over the counter you could also create an EUR option on a EUR Nikkei index (with a strike in Euros), I can't see a real life listed example however.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.