A Quantity-Adjusting Option (Quanto Option) is a type of financial instrument often used in foreign exchange (FX) trading markets. Specifically, it is an exotic derivative, and most transactions involving it are carried out over the counter.

A Quanto Option is designed to remove the risk of currency exchange rate fluctuations from the equation when trading options in the forex market. It works by denominating the underlying asset in a national currency and then settling the contract in another, foreign currency. This approach ensures that the exposure to exchange rate fluctuations resulting from the exchange of two different currencies is removed, thus making the process more manageable and easier to predict.

The primary benefit of using Quanto options is that they allow market participants to diversify their portfolios in the long run and make foreign investments more accessible. This is especially true in markets where currencies are prone to be volatile. It allows for risk to be reduced and for investors to make more informed decisions about their investments.

In addition, Quanto options can be used for hedging purposes, as well. They can help mitigate or eliminate the risk related to currency exchange rate fluctuations by allowing an investor to speculate on the movement of both the underlying asset and the foreign currency. This might be especially beneficial for businesses involved in international trade or those with exposure to multiple currencies.

In conclusion, Quanto options are a type of exotic derivatives that has the primary aim of removing currency exchange rate risk from foreign options trading. By denominating the underlying asset in a specific currency and settling the contract in a different one, exposure of the transaction to currency fluctuations can be reduced, allowing investors to make more informed decisions. Lastly, Quanto options can also be used for hedging, thus allowing businesses to mitigate potential losses.