The volatility that, put into an option pricing model, reproduces the option's market price. It is the market's forward-looking estimate, not a historical one.
Where you will meet it
Implied volatility comes up in 18 learning outcome notes across the FRM syllabus.
A few of them:
Measuring Returns, Volatility, and Correlation FRM Part I · Quantitative analysis
“Implied volatility is different in kind.”
Measuring and Monitoring Volatility FRM Part I · Valuation and risk models
“Implied volatility is the forward-looking alternative.”
Structured Credit Risk FRM Part II · Credit risk measurement and management
“Implied correlation is the default correlation that, put into a pricing model such as the Gaussian copula, reproduces the observed market price or spread of a tranche, just as implied volatility reproduces an option price.”
Global Financial Stability Report, Chapter 2 FRM Part II · Current issues in financial markets
“Implied volatility rises after a shock, and the volatility skew steepens because out-of-the-money puts become more expensive relative to at-the-money options and calls.”
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