The timing could not have been better for investors. The National Stock Exchange (NSE) has launched the country?s first Volatility Index (VIX) on Tuesday.
The VIX is a measure of the market?s expectation of volatility over the near term (next 30-day period) calculated as annualised volatility denoted in percentage terms and based on the Nifty 50 index option prices.
Speaking at the launch of the new index, Ravi Narain, MD and CEO, NSE, said, ?The Volatility Index is a good indicator of the investors? perception on how volatile markets are expected to be in the near term. We have done our homework before launching this product and it will help determine the overall volatility in the market.?
The India VIX is calculated using the methodology adopted by the Chicago Board of Options Exchange (CBOE), which was the first to introduce volatility index in the US in 1933. This was adopted for the S&P 500 volatile index.
The Indian index will derive the implied or expected volatility from the near- and mid-month options bid and offer prices of the Nifty 50 index options. From the options bid and offer prices, an indicator can be derived about the degree of volatility investors expect in the market. This volatility figure, denoted in percentage, would be the India VIX value.
Usually, during periods of market volatility, the market moves steeply up or down and the volatility index tends to rise. As volatility subsides, option prices tend to decline, which in turn would cause the volatility index to decline.
Speaking at the event, Sebi chairman CB Bhave said, ?This measure will increase the understanding of the markets amongst the investors, and may be we will be seeing products being launched on this index in future.?
Narain said, ?On the foreign bourses, various tradable products are available, based on the volatility index. However, NSE does not intend to introduce any such products in the immediate future but chances of this in the long term cannot be ruled out.?
The India VIX would be calculated for the entire day and put on the NSE website at the end of the day, and subsequently the index would move to on-line dissemination.
