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India Volatility Index (VIX)

The document discusses how India VIX is calculated, including: - Using bid-ask quotes from near and next month NIFTY options contracts - Computing mid-prices and volatility values for the options - Interpolating volatility values to determine the final India VIX number An example calculation is provided to illustrate the computation process.

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239 views26 pages

India Volatility Index (VIX)

The document discusses how India VIX is calculated, including: - Using bid-ask quotes from near and next month NIFTY options contracts - Computing mid-prices and volatility values for the options - Interpolating volatility values to determine the final India VIX number An example calculation is provided to illustrate the computation process.

Uploaded by

Abhay
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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India Volatility Index (VIX)

Calcualtion and Interpretation.

Goal of this study is to go through example of how it's computed.


Contents of the Report

Introduction
Calculation of India VIX
VIX Computation Method
VIX Computation Example
Computation of Volatility
Computation of VIX from Volatility
Introduction
Volatility Index is a sentiment indicator that helps to determine
when there is too much of optimism or fear in the market.

India VIX is India’s volatility Index which is a key measure of


market expectations of near-term volatility.

This volatility index is computed by NSE based on the order book


of NIFTY Options.

The best bid-ask quotes of near and next-month NIFTY options


contracts which are traded on the F&O segment of NSE are used.

India VIX indicates the investor’s perception of the market’s


volatility in the near term
Calculation of India VIX
India VIX is uses the computation methodology of CBOE.

It’s computed using best bid and ask quotes of the out-of-the money
near and next month Nifty option contracts, which are traded on
the F&O segment of NSE.

There are several factors which influence the calculation which are
highlighted below:

Time to Maturity
Risk free rate
Forward Index level
Bid-Ask Quotes
Time to Maturity:

Time to maturity is calculated in minutes instead of days in


order to arrive at level of precision which is expected by
professional trader.

In our example provided in subsequent pages, the near month


had 11 days (T1) and 38 days (T2) for next month contract.

If we use YEARFRAC function in excel we get fractional value


between two days for example T1 comes to 0.03056 and T2
comes to 0.10556.
Risk free rate:

The NSE Mibor rate of relevant tenure (i.e. 30 days or 90 days)


is being considered as risk-free interest rate for the respective
expiry months of the NIFTY option contracts.

Forward Index level:

The forward index level is being used to select the contracts


which will be used to calculate the index.

In our example we have considered 7200 as index level to


calculate volatility.
Bid-Ask Quotes:

The best Bid-Ask quotes for OTM options are considered for
computation of volatility index.

In respect of strike where bid-ask spread ratio is greater than


30% threshold which is defined by NSE.

We need to use interpolation technique to derive fitted quote.

There are various methods to calculate interpolation as


highlighted below, but we use Natural Cubic Spline.

Linear Interpolation
Lagrange Interpolation
Cubic Spline Interpolation
Cubic Spline Interpolation:

Spline interpolation is a form of interpolation where the


interpolation is a special type of piece wise polynomial called a
spline.

Cubic Spline is preferred method over other polynomial


interpolation as interpolation error can be made small even
when using low degree polynomials for the spline.
VIX Computation Method
The formula used for calculation of India VIX is as follow:
VIX Computation Example
Near & Next Month Data of Nifty Options:
Computation of Mid-Price Q(K)

The midpoint of the bid ask quote for each option contract with
strike K, is required in respect to know whether quotes
available are appropriate.

The spread is calculated using formula:


Spread = (Ask – Bid) / Average of Bid-Ask.

If the spread is greater than 30% then we need to derive best


quote using cubic spline interpolation method, see below
observation where there is a need to interpolate.
Cubic Spline Interpolation Technique
Computation of Mid-Price Q(K) (Cubic Spline)

Wherever there is an issue with a spread, we need to perform


cubic spline interpolation technique to get an appropriate mid
value.
Computation of Volatility
Near & Next Month Final Mid-Quote Values:
Calculating Sigma Value for Near and Next Month:

The contribution of a single option to India VIX value is


proportional to the quote of that option and inversely proportional
to the option contract’s strike price.

For example, the contribution of the near month 5800 Put contract
is calculated as follow:

(100/5800^2)*EXP (0.03055*0.0864)*1.60 = 0.0000048

The final calculation of contribution by strike and variance of near


month and next month is as follow
Contribution by strike for Near and Next Month:
s1: (2/0.03055*0.0013)-(1/0.03055)*((7203/7200)-1)^2 = 0.0864884
Computation of VIX from
Volatility
Computation of VIX from Volatility:

India VIX value is arrived at by interpolating the near and next


month sigma (s1 and s2) values.

NT1 (number of minutes to expiration of the near month


options)
NT2 (number of minutes to expiration of the next month
options)
N30 = (number of minutes in 30 days) =43200
N365 = (number of minutes in a 365-day year) = 525600

Using above equation the final value for India VIX comes to 21.59%
for close of 16th May 2014.
Nifty V/s VIX
Nifty V/s VIX
Appendix:
http://www.nseindia.com/content/vix/white_paper_IndiaVIX.pdf
http://www.cboe.com/micro/vix/vixwhite.pdf
http://www.solvemymath.com/online_math_calculator/interpolation.php
http://en.wikipedia.org/wiki/Spline_interpolation
http://www.nseindia.com/marketinfo/vix/hist_vix_data.jsp?FromDate=01-05-
2007&ToDate=24-05-2014&vixdata=Get+Details&check=new

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