Forward Volatility
Computes the implied forward volatility between two maturities from the corresponding spot volatilities. Just as there's a forward interest rate embedded in two spot rates, there's a forward volatility embedded in two volatilities of different terms, given by √((σ2²·T2 − σ1²·T1)/(T2 − T1)). It's what the market prices for the volatility of the period between the two dates. Enter the two spot volatilities and their terms.
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Forward Volatility
Computes the implied forward volatility between two maturities from the corresponding spot volatilities. Just as there's a forward interest rate embedded in two spot rates, there's a forward volatility embedded in two volatilities of different terms, given by √((σ2²·T2 − σ1²·T1)/(T2 − T1)). It's what the market prices for the volatility of the period between the two dates. Enter the two spot volatilities and their terms.
The future's implied volatility
Just as the market embeds future interest rates in today's rates, it embeds future volatilities in volatilities of different terms. If you know the implied volatility for one year and for two years, you can extract the volatility the market expects specifically for the second year, the so-called forward volatility.
The calculation comes from an additive property: the total variance accumulated to two years is the sum of the first year's variance and the second's. Isolating the second year's part and taking the root gives the formula √((σ2²·T2 − σ1²·T1)/(T2 − T1)). It's the analog, in the volatility world, of the implied forward interest rate.
Enter the two spot volatilities and their respective terms. The tool returns the forward volatility for the interval between them. If the longer-term volatility is lower than expected, the calculation can give a negative value under the root, a sign of an inconsistent volatility term structure, which the tool flags.
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The results provided by this tool are for general informational and educational purposes only and do not constitute professional, financial, medical, legal, tax or accounting advice. Always confirm important decisions with a qualified professional and official sources.