Is Volatility Risk for the British Pound Priced in U.S. Options Markets?

This paper estimates the premium for volatility risk for European currency options written on British pounds. The average annualized premium for volatility risk is neither statistically different from zero nor invariant to the option's moneyness. However, the risk premium is positively and nonproportionaly related to the level of volatility, except for out‐of‐the‐money options. Finding a zero premium for volatility risk does not undermine the assumption of a zero‐price volatility risk in many extant stochastic‐volatility option pricing models and the option pricing formulas in those models.