Quanto

Quanto is an addition to the name for investment and leverage products that are hedged against currency fluctuations .

Quanto products relate to underlyings that are not quoted in the investor's currency. Your aim is to hedge against the risk (or opportunity) of currency fluctuations.

Exchange rate fluctuations can reduce or increase a profit or loss. However, some investors see an additional (incalculable) risk in the exchange rate, which they can eliminate with Quanto products, albeit at the price of additional (administrative) costs.

Financing the coverage creates additional costs. These depend on the volatility, the interest rates of the respective currencies and the correlation between the underlying and the foreign currency. As a result, there are usually slightly higher annual management fees for Quanto products (typically 1–4%).

One way to hedge is to sell a corresponding amount of the foreign currency (on a forward basis), e.g. B. About options. These then reverse the value development from the home currency to the foreign currency and neutralize the loss (or income) from the currency exchange.

example

An investor buys a (non-quanto) index certificate on the S&P 500 at a value of 1,000.00 USD. The euro-dollar exchange rate is 1.00 EUR / USD, ie 1 euro = 1 US dollar.

He invests exactly 1000 EUR.

The rate in the home currency is then calculated as follows:

${\displaystyle P_{\text{Heimat}}=P_{\text{Fremd}}\cdot {\frac {100\,\%+x}{100\,\%+y}}}$

Here x stands for the relative price change in the underlying and y for that in the exchange rate.

	Exchange rate rises by + 5% (home currency becomes more expensive)	Exchange rate unchanged	Exchange rate drops by -5% (home currency depreciates)
Reference value increases by + 5%	${\displaystyle {\frac {105\,\%}{105\,\%}}=100\,\%\ (\pm 0\,\%)}$	${\displaystyle {\frac {105\,\%}{100\,\%}}=105\,\%\ (+5\,\%)}$	${\displaystyle {\frac {105\,\%}{95\,\%}}=110{,}5\,\%(+10{,}5\,\%)}$
Reference value unchanged	${\displaystyle {\frac {100\,\%}{105\,\%}}=95{,}2\,\%\ (-4{,}8\,\%)}$	${\displaystyle {\frac {100\,\%}{100\,\%}}=100\,\%\ (\pm 0\,\%)}$	${\displaystyle {\frac {100\,\%}{95\,\%}}=105{,}3\,\%(+5{,}3\,\%)}$
Reference value falls by -5%	${\displaystyle {\frac {95\,\%}{105\,\%}}=90{,}5\,\%\ (-9{,}5\,\%)}$	${\displaystyle {\frac {95\,\%}{100\,\%}}=95\,\%\ (-5\,\%)}$	${\displaystyle {\frac {95\,\%}{95\,\%}}=100\,\%(\pm 0\,\%)}$

Scenario 1: index rises, exchange rate rises

The price gains of the index are reduced due to the increased exchange rate (home currency becomes more expensive).

Index rises to 1050 USD (+ 5%), exchange rate rises to 1.05 EUR / USD (+ 5%). Result: 1000 EUR.

Scenario 2: index falls, exchange rate rises

The rising exchange rate (home currency becomes more expensive) increases the index's losses.

Index falls to USD 950 (−5%), exchange rate rises to EUR / USD 1.05 (+ 5%). Result: 904.76 EUR (loss: 9.5%).

Scenario 3: Index rises, exchange rate falls

The falling exchange rate (home currency becomes cheaper, foreign currency becomes more expensive) increases the price gain of the index.

Index rises to 1050 USD (+ 5%), exchange rate falls to 0.95 EUR / USD (−5%). Result: 1105.26 EUR (profit: 10.5%).

Scenario 4: index falls, exchange rate falls

The falling exchange rate in turn neutralizes the index's losses.

Index falls to USD 950 (−5%), exchange rate falls to EUR / USD 0.95 (−5%). Result: 1000 EUR.

Currency hedging of the certificate (Quanto)

The investor buys the certificate for 1000 EUR. He also borrows 1000 USD and changes it to (initially) 1000 euros.

If the exchange rate rises to 1.05 EUR / USD, the certificate simultaneously loses 5% of its value (in US dollars). By exchanging his 1000 EUR, however, the investor now receives 5% more US dollars, which compensates for his loss in the certificate.

On the other hand, if the exchange rate drops to 0.95 EUR / USD, the value of the certificate in euros increases by around 5%. At the same time, paying back the US dollar loan is 5% more expensive.

Alternatively , the investor can also buy a put option on the US dollar, ie he acquires the right to “sell” euros (from the sale of the certificate) at a certain dollar rate in the future. By buying the option, he practically “fixes” his exchange rate at the cost of the option.

As a result, exchange rate fluctuations are neutralized by the opposing (short) position in the US dollar.

In principle, every investor can construct this currency hedge himself. However, this is complex (borrowing or calculating the option parameters) and usually more expensive (transaction costs in relation to the amount invested) than a Quanto product.

With a Quanto product, the investor does not have to deal with this complex issue. Its rate in the home currency always corresponds to the base value in the foreign currency regardless of changes in the exchange rate.

Individual evidence

1. ↑ B. Rudolph, K. Schäfer: Derivative financial market instruments. P. 355.
2. ↑ ^{a b} A. Preißner: Investing successfully in certificates. P. 51.
3. ↑ C. Eibl: Everything you need to know about gold: Background, facts and investment tips. P. 65f.
4. ↑ Handelsblatt Online, M. v. Arnim: How much does currency hedging cost? . Retrieved August 2, 2011.
5. ↑ Goldman-Sachs, D. Heß: Why are different management fees charged for Quanto certificates? Experts online . Retrieved August 2, 2011.
6. ↑ Royal Bank of Scotland: Quanto certificates ( Memento of the original from May 19, 2012 in the Internet Archive ) Info: The archive link was automatically inserted and not yet checked. Please check the original and archive link according to the instructions and then remove this notice. (PDF; 777 kB). Retrieved August 2, 2011.