Synthetic quanto spread

fuqs · Sep 30, 2018

I have a question regarding quanto options in the interdealer market.

When a trader hedges his quanto risk in the interdealer market, he trades an ATM Synthetic Quanto Spread (the difference of 2 forwards)
Let's take a "quanto" structure: SPX quanto Euro.

[Call(S)_Dom - Put(S)_Dom] - [Call(S)_For - Put(S)_For]

S: is the foreign index (ex: SPX which is denominated in USD)
_Dom: as in domestic currency
_For: as in foreign currency

Now the question is, how are both legs discounted? OIS_Dom for the domestic option part and OIS_For for the foreign?

sle · Sep 30, 2018

fuqs said:
Now the question is, how are both legs discounted? OIS_Dom for the domestic option part and OIS_For for the foreign?

Do you mean for margin purposes? Shorter-dated stuff would be indeed discounted using the appropriate OIS. Longer dated stuff would frequently trade as deferred premium (i.e. you agree on forward exchange of premiums from all 4 legs) so discounting does not really matter much. As long as you specify the settlement date for the premium differential, it would be self-consistent.

PS. or are you asking for a standard broker-market structure? i have a term sheet kicking around somewhere

fuqs · Oct 13, 2018

sle said:
Do you mean for margin purposes? Shorter-dated stuff would be indeed discounted using the appropriate OIS. Longer dated stuff would frequently trade as deferred premium (i.e. you agree on forward exchange of premiums from all 4 legs) so discounting does not really matter much. As long as you specify the settlement date for the premium differential, it would be self-consistent.

PS. or are you asking for a standard broker-market structure? i have a term sheet kicking around somewhere

Thanks a lot for answering. Yes, standard broker-market structure. A term sheet would be very useful...