Quanto Option is a child type of Exotic Option that represents an Option contract that only differs from a Vanilla Option in that the underlying price observed at exercise is converted to another currency using a fixed exchange rate. More specifically, first the regular cash settlement amount on exercise date is calculated in the currency where the underlying is denominated, also referred as the "foreign" currency. Next that amount is converted in the final payout currency - also referred as the "domestic" currency - by using a pre-specified fixed exchange rate. The mathematical formula for the payoff in domestic currency terms of a european call is:c*max(S-K,0) where S is the underlying price at expiry in foreign currency terms, K is the strike also in foreign currency terms and c is a constant that equals the pre-specified fixed exchange rate. An example of a quanto option in the US would be a European call option that grants a US investor the right to buy a share of a German company with a strike of 100 EUR and a pre-specified fixed exchange rate of 1. Assuming that the German share closes at 110 EUR at expiry, the US investor would receive 10 EUR converted into USD by applying the fixed exchange rate of 1, resulting in a final amount of 10 USD.
The following features are currently not supported by QuantLib: Bermudan exercise style, discrete dividends/storage costs.