For the first time in India, NSE i.e. National Stock Exchange has announced the introduction of volatility index. The volatility index, often known as India VIX, indicates the perception of the investor in terms of market’s volatility. This index will depict the expected volatility of the market for the next thirty calendar days. This means that high the value of India VIX, the higher will be the expected volatility. So far, this volatility index, which is usually expressed in % figure, was revealed at the end of day. However, it will now be displayed on the basis of real time.

NSE stock market will be consulting SEBI to take the permission for starting derivatives on this index. Once the futures as well as options start on this index, various investors, whose portfolios are being affected by the market’s volatility, can make use of the product for hedging all their risks.

The volatility index of India VIX is based upon the index option prices of National Stock Exchange’s benchmark index NIFTY. The volatility index or India VIX is computed by using the ask quotes and best bid of out-of-the money near as well as mid-month NIFTY contract options.

There are various factors which are taken into the account for calculating the index. These include:

Ø  Time of expiry of the option contracts for NIFTY which are used to calculate the index

Ø  A method known as forward index level will be used for selecting the contracts that are used

for calculating the index

Ø  These selected contracts will be used to choose the best bid as well as ask spreads

Ø  Interest rate: the Mibor rate of bank share prices is believed to be the risk-free interest rate for all the respective expiry months of NIFTY contract options.

Ø  Weightage to all these contract options would be given as per the methodology adopted by CBOE i.e. the Chicago Board of options exchange. It is important to note that the Weightage of single contract option will be directly proportional to average of the best bid as well as inversely proportional to the strike price of the option contact.

Prior starting the derivatives in the volatility index, this index should be disseminated on the basis of real time so that the investors can easily understand the behavior of index prior trading on it.

NSE today has gained lots of reputation by the investors. The major reason behind this cause can be due to the Internet. Internet has made it very easier to do the NSE online trading in this competitive world. Nowadays, with just simple clicks, you can have all the required information which you need in this stock world. NSE introducing the volatile index is another benchmark started by the National Stock Exchange.

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