Why in the News?

India Volatility Index (India VIX) surged past the 21-mark on May 14^th. The rise shows that fear among traders or market participants on the expected volatility is more now, as compared to 15 days earlier. Currently, the fear among the market players is coming from the outcome of the ongoing Lok Sabha elections.

What’s in Today’s Article?

• About Volatility Index (Meaning, Working, Significance, Difference from NIFTY, etc.)
• Reasons for Rising VIX

What is the Volatility Index?

• India VIX or India Volatility Index is a volatile index that is calculated by the NSE to measure the market’s anticipation for volatility and fluctuations in the near term.
• This index was first introduced by the NSE in the year 2003.
• However, the original concept of a volatile index goes back 1993, when it was introduced by the Chicago Board Options Exchange.
• Working of VIX:
  • The India VIX gets its value derived by using the Black and Scholes model or the B&S model as it is popularly known.
  • This index uses five variables including the strike price, market price of the stock, time to expiry, risk free rate and volatility.
  • The India VIX value is determined by the bid-ask quotes of near and next month NIFTY options contracts traded on the NSE’s F&O segment.
  • The India VIX value has a direct relation with the volatility, which means that higher the value of India VIX, higher is the volatility. Whereas, lower the value of the India VIX, lower will be the volatility in the market.
• Significance of VIX:
  • This index represents the investors’ perception of the market over the next near term, that is the next 30 days.
  • One can see a rise in the volatile index when the market is continuously fluctuating and going up and down. This shows the increase in volatility in the market.
  • Similarly, when the market is more stable and the volatility is less, one can see a fall in the volatility index.
  • The rise and fall in the India VIX or volatile index determine the volatility of the market and helps the investors to better understand the market conditions before making their next big investment or while keeping a track of their previously made investment.
• Difference Between NIFTY and VIX:
  • It is important to know that the volatile index is in no way similar to the price index like the NIFTY.
  • The price index is calculated by taking into account the price movement of the underlying equities.
  • On the other hand, volatile index or India VIX is calculated using the orderbook of the underlying index options and is represented in the form of a percentage.

Why Has India VIX Surged Recently?

• In May so far, the India VIX has risen by around 53 per cent to above 20. On 14^th May, the index touched a high of 21.88 in afternoon trades.
  • The benchmark for India VIX is not a fixed value, but generally, a value around 20 is considered as a threshold for determining market volatility.
  • If India VIX was previously at 20 and then increases to 21.88, it indicates a rise in expected volatility.
• The volatility is due to the concerns over the results of the ongoing elections, set to be declared on June 4.
• The market participants said a lower voter turnout ratio in this election may have some impact on the final outcome of the election and hence there is a sense of uncertainty among investors.
• Heavy selling by foreign portfolio investors, who have dumped Rs 18,375 crore (till May 13) of Indian equities, have also led to the fall in the domestic market.
• A high number indicates participants are getting more cautious and expect volatility as the elections unfold.