Currency 1: Square-Root function. Formula: H1 = SQRT (S12)

Currency 2: Square-Root function.

Asset 3: Unidentified.

When comparing this payoff with the one in the "PAT In a Two-Currency Environment" section, we again notice that because our original payoff is dependent on the exchange rate S12 only, payoffs for currencies 1 and 2 represent the two-currency case. Payoff for Currency 3, however, is quite different again. As we said in the previous section, the square-root function is one of the very few cases when the payoffs on both sides of the exchange rate are exactly the same. This is clearly not the case in a three-currency environment.