Abstract

This study explores the dynamics between implied and realized exchange rate volatilities in the Indian context focusing on how these measures interact and influence each other. Implied volatility derived from financial derivatives such as options represents market expectations of future volatility while realized volatility is based on historical exchange rate fluctuations. Using a comprehensive dataset of the Indian rupee against major currencies this paper employs econometric models to analyze the relationship between these two types of volatility. The results indicate a significant interaction between implied and realized volatilities with implied volatility providing predictive insights into future realized volatility. This interaction is particularly pronounced during periods of economic or political uncertainty. The findings have implications for policymakers investors and financial institutions highlighting the importance of incorporating both implied and realized volatilities in