Quanto

Such products are attractive for speculators and investors who wish to have exposure to a foreign asset, but without the corresponding exchange rate risk.

For the structure to be called Quanto, the payoff must depend on the market price of a publicly traded commodity.

A typical example of a buyer of a Quanto is a retailer in a liberalized electricity market, with a customer base to which they deliver to a fixed contracted price.

This situation typically occurs if the weather is hotter (colder) than expected and a substantial number of households turn on the airconditioning (heating).

As electricity demand rises sharply in such a situation, spot prices spike while the revenue from the sales side remains constant.