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 = (LIBOR_d– K). N_d . (days/basis)

Whilst the payout of a quanto FRA is given by:

Quanto FRA payout = (LIBOR_d– K). N_f . (days/basis)

where:

LIBOR_d is the floating rate denominated in local currency.

N_d is the notional denominated in local currency.

N_f 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.