A derivative denominated in one currency that settles in another.

Quanto is short for 'quantising adjusting option,' which is also known as a 'cross-currency derivative.' This may take the form of a future or an option, for example. Usually the underlying and strike price currency is the foreign one and the currency in which the derivative pays out is domestic, calculated as the option's intrinsic value. This type of investment is paid at a fixed exchange rate, protecting the investor from fluctuations.

This strategy is often employed in situations where investors are confident in the strength of the underlying asset but uncertain about the performance of the currency in which it is denominated. By denominating the asset in a currency in which they are confident, the level of stability is increased.

An example of this practice is the Chicago Mercantile Exchange's trade in futures on Japan's Nikkei 225 stock index, which are settled in USD rather than JPY.