https://inflection-quant.pages.dev/tags/risk-management/Recent content in Risk-Management on Inflection Quant LabHugoen-usTue, 19 May 2026 00:00:00 +0000https://inflection-quant.pages.dev/articles/quant-foundations/quanto_and_compo/Tue, 19 May 2026 00:00:00 +0000https://inflection-quant.pages.dev/articles/quant-foundations/quanto_and_compo/<h2 id="why-this-matters">Why This Matters</h2> <p>Many of the world&rsquo;s most actively traded commodities are priced in USD, yet end investors and corporates often operate in other currencies. A Canadian oil producer hedging output, a European airline managing jet fuel costs, or an Asian sovereign wealth fund allocating to commodity exposure all face the same underlying issue: commodity risk does not exist in isolation from FX risk. The standard approach is to hedge the commodity leg with USD-denominated futures or swaps and manage FX separately through forwards or options. This works, but it treats the two risks as independent. Quanto and compo options take a different approach by packaging both risks into a single instrument, but the way each handles FX risk creates some pricing and hedging subtleties that I find are easy to miss.</p>