# How bad off are we when we use the “regular delta replication” strategy in an FX market on a Quanto?

See this question for context:

https://quant.stackexchange.com/questions/32725/dynamic-hedge-of-quanto-options#=

In there, I expressed interest in how well the usual strategy of replicating an underlying stock would work in this case. This strategy would consist of investing Delta (derivative of the option's price wrt stock price) in the foreign stock, and borrowing domestically.

Are there some market conditions under which that strategy actually would work? An idea of one such condition could be that the exchange rate remains constant over the relevant period?

• Of course if the exchange rate stays unchanged it would work. But now think if the price of the stock (in terms of foreign currency, say 100 Quanzas per share) stays constant and the FX rate fluctuates. At time T you will have lost/made some money when you settle the contract in domestic currency. – noob2 Mar 3 '17 at 16:51

In summary, you need instruments $XS$, $XB^f$, and $B^d$. By missing any of them, you won't be able to have a self-financing replicating portfolio.