Historical volatility is the actual volatility, or variance, of an exchange rate that occurred during some defined past time frame. This can be used as an indication or guide to future movements in the exchange rate.
- Future volatility is the expected variance in the exchange rate over the life of the option, and must be forecast.
- Implied volatility is the variance in an exchange rate that is implied by or built into the present market price of an option—thus, it is the market’s current estimate of future movement potential as determined by supply and demand for the option in the market.
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