Understanding India VIX
India VIX is another important term for every investor to understand before making any investments. India VIX or India Volatility Rate is a critical measure of market expectations of volatility based on the Nifty 50 index options. Calculated by the National Stock Exchange of India (NSE), it plays a significant role in financial markets by reflecting investor sentiment and market uncertainty.
Whenever a market is continuously fluctuating, the volatility increases. If the market is stable and there are no fluctuations, there is a fall seen in volatility. This rise and fall of volatility helps the investors in understanding the market and make sound financial decisions. India VIX is designed to gauge the market’s expectations of volatility over the next 30 days.
India VIX Value
The value for India VIX is derived using Black and Scholes model (B&S). It was developed by Fischer Black, Myron Scholes, and Robert Merton, is a mathematical model for pricing European-style options. Following are the 5 parameters used by this index:
- S0: Current price of the underlying asset
- X: Strike price of the option
- T: Time to expiration (in years)
- r: Risk-free interest rate
- σ: Volatility of the underlying asset’s returns
India VIX value is directly proportional to the volatility. Higher the volatility, higher will be the value of VIX and vice versa.
Elements Considered While Calculating India VIX
- Time to Expiration: The options considered have varying times to expiration, but the VIX specifically measures the expected volatility over the next 30 days. This is done by using the prices of near-term options and extrapolating the volatility for the desired time frame.
- Bid-Ask Spread: The bid and ask prices of the options contribute to the calculation. The bid-ask spread can impact the accuracy of the volatility estimate.
- Risk-Free Rate (30-90 Days):The risk-free interest rate is used to discount the expected future cash flows of the options.
- Strike Prices:Options with different strike prices are considered. The calculation uses a range of strike prices around the current index level to estimate volatility. This helps capture the full spectrum of market expectations.
India VIX is also known as “Investor fear gauge” since it represents the best prediction made by investors of the near term market volatility.
