Measuring volatility through VIX

What is Volatility Index (VIX)

The volatility index called the India VIX, indicates the investor’s perception of the market’s volatility in the near term. The index depicts the expected market volatility over the next 30 calendar days. i.e. higher the India VIX values, higher the expected volatility and vice-versa. India VIX indicates the market’s perception of the expected near term volatility

A higher volatility means that a security’s value can potentially vary over a larger range of values. This means that the price of the security can change dramatically. A lower volatility means that a security’s value does not fluctuate dramatically, but changes in value at a steady pace over a period of time

The volatility index is expressed in percentage terms and was available at end of the day basis. However, from July 19th, 2010 it s being displayed on a real time basis available on NSE website

How is VIX calculated

India VIX is a volatility index based on the index option prices of NSE’s benchmark index NIFTY. India VIX is computed using the best bid and ask quotes of the out-of-the-money near and mid-month NIFTY option contracts, which are traded on the F&O segment of NSE.

What factors are taken into account to calculate VIX

Time to expiry of the options contracts of Nifty that are selected to calculate the index

The NSE Mibor rate is being considered as risk-free interest rate for the respective expiry months of the NIFTY option contracts

A methodology called the forward index level is being used to select the contracts which will be used to calculate the index

Weightage is given to each of the options contracts that are chosen, as per the method adopted by the Chicago Board of options exchange (CBOE). The weightage of a single options contract is directly proportional to the average of best bid-ask spread of that option contract and inversely proportional to the option contract’s strike price

Where did VIX originate?

VIX is a trademark of CBOE Incorporated and Standard and Poor’s has given a license to NSE, with permission from CBOE, to use this trademark in the name of India VIX and for purposes relating to India VIX

What is the relation between Nifty and VIX

Nifty and VIX are negatively correlated. Based on the data for 2010, it can be observed that when Nifty is on an uptrend, volatility is relatively lower and vice versa.

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