The timing for the launch of the country?s first ever Volatility Index (VIX) by the National Stock Exchange (NSE) on Tuesday could not have been better for the investors, considering the volatile conditions the markets are witnessing.
The VIX is a measure of the market?s expectation of volatility over the near term (next 30 day period) calculated as annualized 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 finally 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 one to introduce volatility index in the US in 1933 and which is adopted to calculate the S&P 500 volatile index.
The 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 as to what is the volatility the investors are expecting 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.?
?On the foreign bourses there are various tradable products available, based on the volatility index, however NSE does not intend to introduce any such products in immediate future but chances of this in the long term cannot be ruled out,? added Narian.
The India VIX would be calculated for the entire day and made available at the end of the day, on the NSE website and subsequently the index would move to on-line dissemination.
