FX Volatility Index
A definition-first reference for how FX volatility is measured and how an index summarizes it.
Plain-English Definition
An FX Volatility Index is a standardized number designed to summarize the market’s expected or realized variability in foreign exchange rates over a stated horizon.
In practice, “FX volatility index” usually refers to an implied-volatility measure derived from FX options (the market’s priced expectation of future fluctuations), though some indexes are constructed from realized volatility using spot returns.
Volatility is the size of moves, not the direction. A volatility index tends to rise when markets anticipate larger FX swings—up or down.
Why the Term Exists
FX is often described as “low volatility” relative to other asset classes, but volatility is not constant. Risk managers, traders, and macro observers use volatility indexes to:
- Track stress and uncertainty across currency markets
- Compare regimes (calm vs. turbulent periods)
- Estimate option premium richness/cheapness in broad terms
- Provide a single headline metric for “how jumpy FX is”
What an FX Volatility Index Does Not Tell You
- It does not predict which direction a currency pair will move.
- It does not explain why volatility is changing.
- It is not a complete risk measure by itself (tails and gaps matter).
- It can be sensitive to methodology, horizons, and option liquidity.
Common Variants
- Pair-specific implied volatility: e.g., EUR/USD 1‑month implied vol.
- Basket index: weighted mix across major pairs (G10) or selected EM pairs.
- Realized-vol index: computed from historical spot returns using a rolling window.
This site is definition-first: terminology and interpretation patterns only. Not investment advice.