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                                                                   India VIX Futures
Volatility as an Asset Class

The global financial crisis has re-emphasised the impact of volatility on portfolios. Post the financial crisis investors started exploring various options to hedge their portfolios against changing volatilities. Focus to index exposure, diversifying across asset-classes and volatility as one of the asset classes have emerged. Exchange traded products on volatility have picked up.

Volatility can be measured through volatility indices. The first volatility index was VIX introduced at CBOE. The volatility index is also introduced in several developed and emerging markets. These volatility indices are measure of market expectation of volatility over a short-term period.

In India, National Stock Exchange of India Ltd has constructed a volatility index called India VIX*.

                                                                          India VIX

India VIX indicates the investor’s perception of the market’s volatility in the near term. From the best bid-ask prices of NIFTY Options contracts, a volatility figure (%) is calculated which indicates the expected market volatility over the next 30 calendar days. India VIX uses the computation methodology of CBOE, with suitable amendments to adapt to the NIFTY options order book.

A high India VIX value would suggest that the market expects significant changes in the Nifty, while a low India VIX value would suggest that the market expects minimal change. It has also been observed that historically, a negative correlation exists between the two. Volatility indices like India VIX are often perceived to display mean reverting characteristics by oscillating around a long-term variance. In the year 2013 the India VIX values were in the range of 13 to 32. Since India VIX signifies volatility, the values will be computed upto 4 decimal places as market participants may like to analyse impact on prices due to small changes in volatility.
More information on India VIX can be found at www.nseindia.com

* “VIX” is a trademark of Chicago Board Options Exchange, Incorporated (“CBOE”) and Standard & Poor’s has granted a license to NSE, with permission from CBOE, to use such mark in the name of the India VIX and for purposes relating to the India VIX
Relationship between India VIX and Nifty

Derivatives on Volatility Indices
Globally exchanges are offering derivative products based on the volatility index. These products have become quite popular among the participants as it expands the opportunities available to participants and provide efficient means to hedge against volatility. Some studies have also shown that derivatives on volatility indices can be useful for portfolio diversification and hedging.

Volatility indices enable market participants to trade expected changes in market volatility in a single transaction. Investors expecting rising volatility levels will go long, whereas investors expecting decline in volatility will be short.
Trading Volatility with India VIX Futures

India VIX Futures enables participants to more easily hedge, trade and arbitrage the expected volatility. Benefits of India VIX futures are as under:

  • India VIX futures can be used to hedge equity portfolios
  • Investors can diversify the portfolio by adding India VIX futures
  • Option traders can hedge Vega risk in their option portfolios
  • Investors will be able to take directional views on volatility
  • Calendar spread trading can be explored across weekly contracts.

India VIX Futures Contract Specifications Underlying:

India VIX Index Symbol          : INDIAVIX

Instrument Type                   : FUTIVX

Lot Size                               : 750

Quotation Price                    : India VIX Index *100 Contract Value

Tick Size                             : Rs. 0.25

Quantity Freeze                   : 15000

Trading Hours                      : 9:15 AM to 03:30 PM

Expiry Day                           : Tuesday

Contract Cycle                      : 3 Weekly contracts

Daily Settlement Price           : Last half hour’s weighted average price of futures

Final Settlement Price           : Closing price of the underlying index

Final Settlement Procedure    : Cash Settlement Final Settlement day

All open positions on expiry date shall be settled on the next working day of the expiry date (T+1)

Launch of trading in Futures contracts on India VIX         : Wednesday, February 26, 2014.

Source : NSE

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