BUZZ-COMMENT-FX volatility risk premiums remain stubbornly overpriced

Feb 25 (Reuters) - FX option premiums have declined this month, with many touching longer-term lows. Yet, despite these drops, they remain notably expensive.

Volatility is an uncertain yet crucial factor in FX option pricing. Since it cannot be known in advance, dealers rely on implied volatility as a proxy. The gap between implied and realised (actual) FX volatility over the life of an option ultimately dictates whether it results in a profit or a loss.

Recent implied volatility losses reflect the lack of FX realised volatility as the dollar consolidates its recent setbacks and U.S. President Donald Trump's trade tariffs weren't as harsh as initially threatened. However, when compared to past realised volatility measures, implied volatility still looks expensive.

FX realised volatility over a defined period in the past (also known as historic volatility) can offer a fair value gauge for FX implied volatility. Past FX realised volatility for a significant percentage of currency pairs and maturity dates is below current implied volatility levels as shown in the attached graphics.

Unless actual/realised volatility makes a strong comeback, implied volatility appears destined to resume its recent downtrend.

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