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Quanto Forward Rate Agreement


A forward rate agreement (FRA) in which the notional principal amount is denominated in a currency other than the currency in which the payout is settled. The payout of a vanilla FRA can be defined as:

Vanilla FRA payout = (LIBORd– K). Nd . (days/basis)

Whilst the payout of a quanto FRA is given by:

Quanto FRA payout = (LIBORd– K). Nf . (days/basis)

where:

LIBORd is the floating rate denominated in local currency.

Nd is the notional denominated in local currency.

Nf is the notional denominated in foreign currency.

K is the strike level.

A quanto swap can be constructed by aggregating a strip of quanto FRAs.



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