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What is a quanto contract?

In a typical futures contract, there's a base currency and quote currency. For e.g. in the case of an ETH futures contract that is quoted in USD, ETH is the base currency and USD is the quote currency. The margin and P&L of this contract could be potentially denominated in USD (vanilla futures) or ETH (inverse futures).

Quanto provides a third choice. By using a fixed multiplier the margining and settlement currency can be changed to a third currency. For instance, a BTC-USD multiplier can be defined to create an ETH vanilla quanto that is quoted in USD, but has its margin and P&L denominated in BTC. This is achieved by converting USD values to BTC using a fixed exchange rate provided by the BTC-USD multiplier.

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