NSE unveils volatility index to gauge market swings

A volatility index captures the implied volatility embedded in prices of options and reflects markets expectations of volatility over the near term. In this regard, India VIX, which will be calculated using the prices of 50 stock options of Nifty, will indicate by how much the Nifty could fluctuate over the next 30 days.

"Over the last decade or so, there has been a paradigm shift in the Indian capital markets. The Indian markets are no longer isolated from the global economic events. We have witnessed bouts of volatility in our markets, some of which may have their origin in global events. The recent sub prime crisis and news of probable recession emerging from the US, are examples of how events which are international, can cause volatility in our markets. Inflation rates, global energy prices, exchange rate fluctuations etc. are witnessing constant changes in the recent years. These are affecting the volatility of the markets," NSE said on its website.

In this regard, "the India VIX is a simple but useful tool in determining the overall volatility of the market. The index captures the implied volatility embedded in option prices. Not only is the volatility index used as an indicator of implied volatility of the market, various tradable products, such as futures and options contracts are available on the volatility index internationally," it said.

"A Volatility Index reflects the market's expectation of volatility over the near term. The index captures the implied volatility embedded in option prices. Volatility is often described as the 'rate and magnitude of changes in prices' and, in, finance often referred to as risk. Volatility Index is a measure, of the amount by which an underlying Index is expected to fluctuate, in the near term, (calculated as annualized volatility, denoted in percentage e.g. 20 percent) based on the order book of the underlying index options. Market volatility keeps changing as new information flows into the market. It would be imperative for market participants to have an index designed to track market volatility," it explained.

"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," Ravi Narain, managing director and CEO, NSE, said, following the launch of the index on April 8.

Different people can use a VIX for different purposes, Narain said. Some people may take it into their books and trade on it. Others may hedge, and some may make changes in their asset class, he said.

"Greater the liquidity in the options segment, better the index. There are also plans to introduce an intra-day volatility index once this one finds acceptance among market participants," a senior NSE official added.

Welcoming the launch of India VIX, a market analyst said, "The India VIX value provides the expected volatility perceived by the market over the next thirty calendar days. Based on the India VIX value an investor can perceive the expected change in his portfolio of investments and thereby take necessary risk management action to safeguard against the uncertainty."

"Globally such volatility indices are used by those investors who use stock and index options frequently. For India, it would be very useful for hedge funds and foreign institutional investors (FIIs) who invest through the options route," the analyst said.