The volatility of foreign exchange options is usually expressed as a percentage, indicating the market's expectation of exchange rate fluctuations. The higher the volatility, it means that the market expects the future exchange rate to fluctuate greatly; The lower the volatility, the smaller the market's expectation of future exchange rate fluctuations.
Volatility is the key input factor of foreign exchange option pricing. In the classical option pricing model, such as Black-Scholes option pricing model, volatility is an important variable that affects the option contract price. Higher volatility will lead to an increase in option prices, because exchange rate fluctuations will increase in the future, and option holders will be more likely to make profits. On the contrary, lower volatility will lead to the decline of option price.
The volatility of foreign exchange options is usually calculated and speculated from two aspects: historical volatility and market expected volatility. Historical volatility is calculated according to the average value of real exchange rate fluctuations in the past period, while market expected volatility is derived from the actual transaction price in the option market.