| Abstract: | Financial decision makers often consider the information incurrency option valuations when making assessments about futureexchange rates. The purpose of this article is to systematicallyassess the quality of option-based volatility and density forecasts.We use a unique dataset consisting of more than 10 years ofdaily data on over-the-counter (OTC) currency option prices.We find that the OTC implied volatilities provide largely unbiasedand fairly accurate forecasts of one-month- and three-month-aheadrealized volatility. Furthermore, we find that the one-monthoption implied density forecasts are well calibrated for thecenter of the distribution, but we find evidence of misspecificationin the tail density forecasts. |
