The Volatility Index, better known as VIX, is a crucial market metric that measures the expected short-term volatility in the stock markets. Volatility here reflects the speed and scale of changes in the prices of stocks or index values. This article will delve into the dynamics of the VIX Index, its origins, application in India, as well as an overview of the National Stock Exchange (NSE).
An Overview of the VIX Index
The VIX Index mirrors the collective predictions of market volatility over the coming 30-day period. Due to the nature of the information it provides, the VIX Index also goes by the titles ‘fear gauge’ or ‘fear index.’ The Chicago Board Options Exchange (CBOE) first conceived and introduced this index in 1993, basing its calculation on the prices of the S&P 500 Index.
Introduction of the India VIX
Seven years after the conception of the VIX Index by the CBOE, the National Stock Exchange (NSE) of India introduced its version – the India VIX in 2010. The computation of the India VIX is based on the CBOE’s original methodology but has been modified slightly to align with the specifics of the Indian market. The India VIX symbolizes the Indian market’s projected volatility from the investor’s viewpoint.
The Relationship between Volatility and India VIX Value
There exists a parallel relationship between the volatility and the value of India VIX. An upsurge in VIX value implies that the market anticipates heightened volatility in the near future. Conversely, a decrease in VIX value indicates an expectation of lower market volatility. Further, the India VIX displays a robust negative correlation with Nifty, which means that a drop in India VIX corresponds with a rise in Nifty, and vice versa.
The Role of VIX Value in Options Contracts
Options contracts, widely used derivative instruments, also consider VIX value as an essential parameter while deciding their pricing. Hence, tracking the movement and trends in VIX value can provide crucial insights for investors interested in these financial vehicles.
National Stock Exchange of India Ltd. (NSE)
Finally, it is important to briefly touch upon the institution that launched the India VIX – the National Stock Exchange of India Ltd. (NSE). The NSE, headquartered in Mumbai, stands as the predominant stock exchange of India. It holds the distinction of being the first dematerialized electronic exchange in the country since its establishment in 1992.
