Volatility

Volatility: a measure of how strongly and how often the price of an asset or an exchange rate changes. In a calm market, the rate moves by fractions of a percent in a week. In a volatile market, it can move more in a day than it usually does in a month.

How it is measured

It is usually calculated as the standard deviation of rate changes over a period. There are two kinds:

• historical volatility: based on actual past movements;
• implied volatility: based on option prices, that is, on market expectations.

For a business, it is simpler to look at the range: the difference between the high and the low of the rate over a week or a month.

How it affects foreign trade

• Total cost. Between signing the contract and paying, the rate can move a long way. This is currency risk.
• Quotes. On a nervous day, banks and agents quote a rate for a short time and build in a buffer. The FX markup grows.
• Spreads. The gap between the buy and sell rates widens, especially for less liquid currencies.
• Planning. It becomes harder to calculate the cost price and the selling price.

What to watch for

• Compare the agent’s rate with the exchange or interbank rate at the same moment, not with yesterday’s Bank of Russia rate.
• If the rate is set after the money is debited, on a volatile day the result can differ noticeably from what you expected.
• For large contracts, consider hedging.

When VEDmost arranges the payment, the rate is fixed in the payment order before the roubles are debited. You can compare your current rate on the Compare your rate page.