A quanto cap/floor straddle is a vanilla strategy whereby you enter into a quanto cap and a quanto floor simultaneously, using the same strike, expiry and notional.
For more information on quanto caps and floors, see Quanto Cap/Floor.
Advantages of a Quanto Cap/Floor Straddle
A quanto cap/floor straddle is generally used in the market as a liquidity trade. A straddle is the basic method of trading volatility which is increasingly regarded as an asset class in its own right. A buyer of a straddle is simply looking for volatility; it does not matter in which direction.
Pricing a Quanto Cap/Floor Straddle in SDX Interest Rates
In SDX Interest Rates:
The premium, which is expressed as a percentage of the notional, is usually paid upfront. However, it can also be paid in installments over the life of the quanto cap/floor straddle.
The upfront payment to be made for a quanto cap/floor straddle is shown in the Market Price result. The Amortize premium result shows the annual periodic payment that would be paid if the quanto cap/floor straddle was bought in installments.
By default the Amortize premium result is not displayed. You can choose to display it in the Settings window. For more information see Displaying the Cap/Floor Premium as an Amortized Value .
A quanto cap/floor straddle is priced as a variation of a quanto cap/floor (see Pricing a Cap/Floor Straddle in SDX Interest Rates).
To select a quanto cap/floor straddle:
| 1. | From the Option/Swap dropdown list, select Caps/Floors, and then Quanto Cap/Floor. |
| 2. | Then toggle the button to Straddle. |