What is Historical Volatility?
Definition of Historical Volatility: It can be explained as a method in which the volatility of the underlying asset cost is calculated or the relative cost for the currency cost over a certain time period in the history. It can be utilized to calculate if the implied volatility of the future option is costly by the past standards. There are generally two ways for considering volatility. The best popular way is to evaluate standard deviation by a sequence of change in rate that has occurred in the earlier days. In such a situation a trader can select the time that seeks interest no matter whether he takes ten or thirty days. This evaluation yields the past volatility. Moreover, a trader is concerned about the expectations in the future and generally seeks an insight from the premiums that are charged in the market. The approach is known as implied volatility. This kind of volatility correlates in a direct manner to the past values because of the uncertainty of market regarding the future. As far as the currency market is concerned, it is found by several studies that this type of volatility is a perfect forecaster of the future volatility, which is regarded better than the historical volatility, mainly more than a period of 30 days. Volatility is generally stated on a yearly basis as a change in the percentage. For making adjustments in the short time period, the yearly figure must be separated by the entire period’s square root.