Volatility Basics

What “volatility” means in FX, how it’s measured, and why “implied” and “realized” differ.

Volatility in One Sentence

Volatility is the typical magnitude of returns over time. In FX, returns are often measured as percentage (or log) changes in spot rates.

Realized vs. Implied

• Realized volatility: calculated from actual historical spot returns over a window (e.g., last 30 trading days).
• Implied volatility: inferred from option prices; reflects the market’s priced expectation (plus risk premia) for future variability.

Annualization and Horizons

Volatility is often annualized to make horizons comparable. A “1‑month implied vol” is usually quoted as an annualized percentage even though it refers to a 1‑month horizon.

Why Implied Can Exceed Realized

Option prices embed compensation for bearing uncertainty and tail risk. As a result, implied volatility can be persistently higher than realized volatility, especially during risk-sensitive regimes.