VIX and Its Significance in Risk Management and Derivatives

RISK MANGEMENT AND DERIVATIVES
2018

VIX AND ITS SIGNIFICANCE 1
Table of Contents
Question 1..................................................................................................................................3
Answer 1....................................................................................................................................3
Introduction............................................................................................................................3
Development of VIX..............................................................................................................4
VIX’s importance...................................................................................................................4
Question 2..................................................................................................................................5
Answer 2....................................................................................................................................5
Question 3..................................................................................................................................7
Answer 3....................................................................................................................................7
Performance of the ETP’s......................................................................................................7
Question 4................................................................................................................................10
Answer 4...............................................................................................................................10
Short Volatility Strategies....................................................................................................10
Selling Techniques...............................................................................................................10
Multi-Strategy.......................................................................................................................11
Fluctuations in stocks...........................................................................................................11
Short risk and reward strategy..............................................................................................13
Conventional Analysis..........................................................................................................13
References................................................................................................................................16

VIX AND ITS SIGNIFICANCE 2
Question 1
Answer 1
Introduction
The CBOE volatility index is a common and the prolific measure of the stock market
expectation of volatility implied by S&P 500 index options. The calculation and the
publishing of the index are supervised the Chicago Board Options Exchange. It is also known
as the index of the fear gauge. This form of an index was created in the year 1993 by Robert
F. Whaley who was the professor of the Duke University. As indicated by the CBOE the
assessed instability of the S/P 500 record is estimated by VIX for an aggregate time of the
multi-day at the cash OEX alternative. These incorporate mutual funds, proficient
administrators with the heap of the cash, and the people that make ventures which looks to
benefit from the instability of the market. VIX is a suggested instability in the speech of the
business of the securities. It is similar to the securities which give the yield at the season of
the development. The VIX is frequently alluded to as the "financial specialist fear measure"
(Whaley, 2000).
For the most part when the stock costs are falling and speculators are having a dread the
unpredictability and the record climb in like manner. Like a bond, an investment opportunity
has a model for its valuation and furthermore, the quantity of parameters is locked in which
are to be assessed with abnormal state of precision (Whaley, 2000). To discover the
suggested instability the market cost of the listed alternative is likened with demonstrate
esteem. This inferred unpredictability is accordingly the best benchmark of the normal
instability of the fundamental stock over the rest of the life of the choice. Since VIX depends

VIX AND ITS SIGNIFICANCE 3
on S&P 100 record choice costs, VIX speaks to a market accord of the S&P 100 with
expected instability.
Development of VIX
At the point when the exchanges of the investment of stocks started in the year 1973, Chicago
Board Options Exchange has ensured that the market volatility index can be built by the
option price which can showcase the expectations of the future.
Since the inception of the thought, numerous techniques were proposed by various
researchers and there after Whaley proposed a straightforward approach which focuses on
dealing with the development of the market volatility. This approach is used as a measure for
the future stock price in the financial market. In the same year, the Chicago Board Option
Exchange began to figure out the construction of the CBOE index of the volatility also
known as VIX. The VIX depends on the implicit volatility of the S&P 100 index alternatives
(Cboe volatility index, 2018).
From thereafter the CBOE engaged in the calculation of the various VIX indexes, including
the VIX based on S&P 500 index, CBOE DJIA, CBOE Russell 2000, RVX, NASDAQ 100
volatility index. VIX was launched in April 2008 by national stock exchange and is depends
on Nifty 50 index option prices (Whaley, 2009).
VIX’s importance
The CBOE volatility index is helpful in estimating unpredictable risk of the S&P 500 over a
multi-day target time period for example 3 to 4 days in general. For the purpose of the
calculation the Chicago Board options Exchange works upon the observation of the price and
its behaviour of different call options and the option of the put money on the index of the
S&P 500, where different strike prices as well as the multiple expiration dates are known for
the incorporation of the trading and the weekly options. Further, the weighted average