Abstract
This section reviews the performance of implied volatility (IV) in forecasting volatility and pricing options in different markets in the existing literature. This study involves a rigorous literature review to identify the research gaps and discover the potential of intraday IV to forecast volatility of foreign exchange and pricing currency options. First, the literature review focuses on the performance of IV to forecast volatility of the stock, stock index, and currency market. Several empirical studies analyse the performance of only daily IV in forecasting volatility. Therefore, the performance of intraday IV to forecast volatility is one of the critical issues in this study. Second, we examine the literature on the RV to confirm that it is appropriate to use as a proxy for the actual volatility. The appropriateness of RV for an alternative of actual volatility is critical since the performance of intraday IV is evaluated through forecasting RV. Third, this study investigates the literature, and no significant research has been found on the IV for pricing options. However, the IV is widely accepted in the literature that the information content embedded in IV is vital to forecast the volatility of the underlying asset of options. Thus, a potential research issue that is evaluating the performance of IV to estimate the price of currency options by using it as input for the options pricing model. Fourth, the literature focuses on the biasedness of the options pricing model, which has an impact on the performance of IV for pricing currency options.