quanto adjustment formula example

what is a quanto adjustment?

it’s an adjustment to forward price of underlying if payoff’s currency is diferent from underlying’s currency

if payoff currency is EUREUR and underlying is in USD (for example DowJones index)

then we’ll need to adjust dividend yield of Dow jones by this quanto adjustment formula:

FX=EURUSD (numeraire USD)

S= DJ index (USD)

$$ q=q-\rho \sigma_{FX} \sigma_{S}$$

$$\rho$$ is a correlation between EURUSD and and Dow Jones