Trading in India VIX futures in NSE
Investors and Traders can now trade in India VIX futures on National Stock Exchange of India. India VIX futures will be available for trading from 26 Feb 2014.
Volatility Index, India VIX index is calculated using the Out of The Money (OTM) Nifty Options which are traded on NSE. It is computed based on the Near Month and Mid Month OTM Nifty options ask-bid spread. It indicates what market movement in Index is expected by market participants in near term. In the case of VIX Futures it is the expected volatility in next 30 calendar days. Calculation of VIX involves complex process and is trade mark of CBOE. It is adopted to Indian Conditions with suitable amendments.
Factors considered in calculation of India VIX Index
1) Time to Expiry which is calculated in hours for more accurate results
2) MIBOR rate of appropriate duration (30 days or 90 days) is used as risk free interest rate
3) Out of the Money Nifty options identified using forward index level are used.
4) Bid Ask quotes of OTM Nifty option contract which are identified using ATM Strike. ATM strike the strike which is just below Forward Index Level.
Trading in India VIX futures will have a tick value of 0.0025 as its value is calculated up to 4 decimal points.
If reliable quotes are not available then values are arrived at by using interpolation of Natural Cubic Splines, a statistical method. The variance for the near and mid month expiry computed separately are interpolated to get a single variance value with a constant maturity of 30 days to expiration. The square root of the computed variance value is multiplied by 100 to arrive at the India VIX value.
Important Contract Specifications – India VIX Futures
Instrument Name of India VIX Futures: FUTIVX
SYMBOL of India VIX Futures : INDIAIVX
Three weekly contracts will be available at any time which expire on every tuesday. New contracts will be introduced after expiry of contract on tuesday. If tuesday is a holiday prior trading day will be expiry day.
Initially on introduction for trading in India VIX Futures, contract value will be 10 lakh rupees. (For normal index and stock derivatives it is 2 lakh rupees). As VIX is usually in the range of 20, for ease of calculation, quotation price will be in multiples of 100 of India VIX Value. For example if Index value is 20 then the quoted price will be 20*100 = 2000. Lot size will be declared later. The operating range will be 10% of the base price as against 20% of stock futures etc.,
The minimum Initial margin percentage on India VIX futures shall be 9% which shall be adjusted going forward as determined by NSCCL.
Historical India VIX chart
Introduction of India VIX index for trading on NSE will help investors and traders to mange their risks efficiently. As indicates the expected volatility in near future (30 calendar day), market participants can construct their portfolios taking their risk appetite in consideration. Higher the value of India VIX index, higher the expected volatility and vice versa.