A foreign exchange contract in which the notional is determined by a specific tradable financial price/ asset. For instance, the notional might be determined by the value of a bond or stock. In this sense, a variable notional forward foreign exchange contract (VNFF) is basically similar to a quanto, whereby the notional characteristically changes in line with the value of its underlying. The payoff of a VNFF is given by:
Payoff = (X0 – X*) . S* . N
where:
X0 is the spot outright exchange rate
X* is the future outright exchange rate
S* is the spot rate N is the notional amount.
