This paper investigates the empirical relation between spot and forward
implied volatility in foreign exchange. We formulate and test the
forward volatility unbiasedness hypothesis, which is the volatility
analogue to the extensively researched hypothesis of unbiasedness in
forward exchange rates. Using a new data set of spot implied volatility
quoted on over-the-counter currency options, we compute the forward
implied volatility that corresponds to the forward contract on future
spot implied volatility known as a forward volatility agreement. We
find statistically significant evidence that forward implied volatility
is a systematically biased predictor that overestimates future spot
implied volatility. The bias in forward volatility generates high
economic value to an investor exploiting predictability in the returns
to volatility speculation and indicates the presence of predictable
volatility term premiums in foreign exchange