Forward volatility is the implied volatility for a specific future time period, derived from the current term structure of implied volatility. It represents the market's expectation of how volatile an asset will be between two future dates — for example, the expected volatility of Nifty 50 between three months and six months from now. Forward volatility is calculated from the difference between the variance implied by longer-dated options and shorter-dated options. It is a critical input for pricing cliquet options, forward-starting options, and variance swaps. When the forward volatility term structure is upward sloping, the market expects future volatility to be higher than current volatility — often ahead of known risk events like RBI policy meetings, Union Budget announcements, or quarterly earnings seasons in India.
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