The National Stock Exchange (NSE) started trading of futures contracts based on the Indian VIX index from 26thFebruary, 2014.
India VIX is the pet name for the India Volatility Index, an index disseminated by the NSE.
It measures the degree of volatility or fluctuation that active traders expect in the Nifty50 over the next 30 days.
The India VIX index is calculated from the prevailing index option prices of the Nifty and is usually denoted as a percentage rather than an absolute value.
This is very different from a price index such as the Nifty that is computed based on the movements in price of the underlying constituent stocks.
The higher the index value the more volatility this is expected by the markets in the short term.
It was the Chicago Board Options Exchange which originally came up with the term VIX in 1993 and the NSE, with the CBOE’s permission, kicked off the India VIX a few years ago.
The VIX calculation is based on the Black Scholes Model which is used to price options contracts.
The Black Scholes model uses five key variables to arrive at the ‘fair price’ of an options contract: the strike price of the contract, the market price of the stock, the time to expiry, the risk-free rate and volatility.
The VIX arrives at the volatility expected by the traders in the market by back-working from buy-sell prices of Nifty options contracts.