Quantity-Adjusting Option - Quanto

A cash-settled cross-currency derivative in which the underlying asset is denominated in a currency other than the currency in which the option is settled. Quantos are settled at a fixed rate of exchange, providing investors with shelter from exchange-rate risk because they contain an embedded currency forward based on a variable notional amount on which the derivatives are quantity adjusted.

Investopedia Says:
The CME Nikkei 225 is an example of a quanto. It is a futures contract for which the underlying asset - in this case, the Nikkei 225 Stock Average index - is settled in U.S. dollars, as opposed to Japanese yen.

Investors use quantos when they believe that a security will do well in another country but fears that country's currency will not. Thus, the investor buys an option in the foreign stock while keeping the payout in his or her home currency.

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