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Investors can use the market volatility index to gauge risks
February 2, 2014:
VIX is a trademarked symbol for the Chicago Board Options Exchange (CBOE) Market Volatility Index. It represents the market’s expectation of volatility over a pre-defined period.
India VIX is a volatility index based on the Nifty index option prices. From the best bid-ask prices of Nifty options, a volatility figure (in per cent) is calculated, indicating the expected market volatility over the next 30 days.
India VIX uses the computation methodology of CBOE, with suitable amendments to adapt to the Nifty options order book.
The current value of India VIX is 25, which means people envisage that, over the next 30 days, markets can move up or down by 7.21 per cent (25 divided by square root of 12 or 3.46).
So, India VIX divided by 3.46 gives you the range over which the market is expected to move over the next 30 days. India VIX is computed using the best bid/ask quotes from out-of-the-money, near and mid-month Nifty option contracts, which are traded on the futures and options (F&O) segment of NSE.
Several factors are used in the calculation of the volatility index. Here are some important ones:
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