The Hindu Business Line : NSE launches VIX index on Nifty-50 options

Mumbai, April 8 Indian markets may soon see the introduction of volatility index-based products, said the SEBI Chairman, Mr C.B. Bhave, no sooner than he had unveiled India’s first volatility index, launched by the NSE on Tuesday.

The volatility index, called ‘India VIX’ is computed using the prices of Nifty 50 Options.

Underlying index

The analogy used by a SEBI official was that of the stock markets, before the launch of the benchmark indices — Sensex and Nifty. “People would say the markets went up or down, perhaps based on whether the stocks they were looking at had gone up or down. But the benchmark index gives you an indication of how much.”

Similarly, one talks about how volatile the market is, but there is no indicator or measure of volatility, which is what a VIX is seeking to provide.

“A volatility index reflects the market’s expectation of volatility in the near term,” said a statement from the NSE. “Volatility index is a measure of the amount by which an underlying index is expected to fluctuate in the near term, based on the order book of the underlying index options.”

Negative correlation

Options prices themselves change with changes in spot prices and volatility, noted a SEBI official. Typically, the VIX has a negative correlation to index returns, explained a SEBI official. The India VIX is a measure of the market’s expectation of volatility for the next 30 days; it was 31.40 per cent on Tuesday, the day it was launched, against 30.99 per cent on Monday . This is the expected or perceived volatility for 30 days annualised in percentage terms.

When the NSE started putting out MIBOR figures day after day, the market launched products off the MIBOR eventually, noted Mr Ravi Narain, Chairman and Managing Director of NSE. The same, one hopes, will happen with the VIX, he said.

Different people can use a VIX for different purposes, he 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.

Quite optimistic

In the immediate future, there are no plans to launch tradable products on the India VIX. However, the SEBI Chairman seemed quite optimistic about the possibility.

“We hear some people say that the indexes do not reflect the market. Now we may hear that the volatility index does not reflect the market. I think this debate will be healthy. By the time the market develops an understanding of this index, we may be ready to launch products on it,” he said.

Eventually, daily volatility indices could be launched too, said a SEBI official.