India Volatility Index

16.05.2024

India Volatility Index

Why in the news?

         India VIX, which is an indicator of the market’s expectation of volatility over the near term, surged past the 21 mark.

What is the Volatility Index?

• The Volatility Index, VIX or the Fear Index, is a measure of the market’s expectation of volatility over the near term.
•  It is often described as the ‘rate and magnitude of changes in prices’ and in finance often referred to as risk.
• Usually, during periods of market volatility, the market moves steeply up or down and the volatility index tends to rise. As volatility subsides, the Volatility Index declines.
• The Chicago Board of Options Exchange (CBOE) was the first to introduce the volatility index for the US markets in 1993 based on S&P 100 Index option prices.
• In 2003, the methodology was revised and the new volatility index was based on S&P 500 Index options.

What is India VIX?

• India VIX is a volatility index computed by the NSE based on the order book of NIFTY Options.
• India VIX indicates the investor’s perception of the market’s volatility in the near term i.e. it depicts the expected market volatility over the next 30 calendar days.

     ○The higher the India VIX values, the higher the expected volatility and vice versa, as per NSE.

Why Has India VIX Surged Recently?

• In May so far, the India VIX has risen by around 53 per cent to above 20. On 14th May, the index touched a high of 21.88 in afternoon trades.

     ○The benchmark for India VIX is not a fixed value, but generally, a value around 20 is considered as a threshold for determining market volatility.

     ○If India VIX was previously at 20 and then increases to 21.88, it indicates a rise in expected volatility.

• The volatility is due to the concerns over the results of the ongoing elections, set to be declared on June 4.
• The market participants said a lower voter turnout ratio in this election may have some impact on the final outcome of the election and hence there is a sense of uncertainty among investors.
• Heavy selling by foreign portfolio investors, who have dumped Rs 18,375 crore (till May 13) of Indian equities, have also led to the fall in the domestic market.
• A high number indicates participants are getting more cautious and expect volatility as the elections unfold.

                                                          Source: Indian Express

Q :- Consider the following statements about India VIX:

1.India VIX is calculated by the National Stock Exchange (NSE) based on NIFTY Options.

2.India VIX reflects investors' expectations of market volatility over the next 90 days.

3.India VIX tends to rise during periods of high market volatility and uncertainty, such as during elections.

4.The calculation of India VIX includes the best bid-ask quotes of near and next-month NIFTY options contracts.

How many of the above statements are correct?

A.Only one

B.Only two

C.Only three

D. All four

Answer: C