 "Your wait for new VIX derivatives got longer")
The National Stock Exchange (NSE) had applied to the regulator for the start of VIX-based derivatives. Sebi has communicated its lack of comfort with the product, though it is yet to deny the application, according to a source.
“It is felt that such a product might be too speculative in nature,” said the person. An NSE spokesperson declined to comment.
The BSE exchange had also launched its own version of a volatility index. It is based on the Sensex, its own benchmark index, and provides a measure of the latter’s historical volatility. An exchange spokesperson said they had not applied for a derivative product based on the index yet.
NSE introduced its VIX index, also called the market’s fear gauge, in 2008; it began to disseminate it on a live basis from July 2010. The NSE’s India VIX is computed on the basis of Nifty (its benchmark index) options and is a measure of expected market volatility over the next 30 days. The higher the value of VIX, the greater is the expected volatility.
Analysts say introduction of the product would help hedging of portfolios against market volatility, though there is a lack of awareness currently about the function and utility of the VIX.
Siddharth Bhamre, head of equity derivatives at Angel Broking, suggested there could be some justifiable concern over how much investors can grasp on the functioning of a volatility index but the novelty of a new product could help increase participation in derivatives as a whole. “It is necessary to educate people but that should not mean that it should not come in at all. The introduction of new products may attract people to the older segments as well,” he said. “My worry is people should understand…there are people buying and selling options without understanding VIX. The retail segment should be educated.”
“If the product would have been introduced, institutions would have probably used it first and then individuals or retail investors, once they understand how it works. A VIX derivative would in demand if there is high volatility and less so if the volatility dies down,” he said.
Entities which currently wish to take a view on expected volatility have to take a position in the options segment and protect against a change in price by using futures. This necessitates multiple transactions and a process both more expensive than and more difficult to put through than a straight trade on a VIX derivative.
Vijay Kanchan, an independent market analyst, said introduction of VIX products would help in better price discovery in the options space, as well as making it far easier to take a view on expected volatility.
“It is very expensive and cumbersome now to take a view on market volatility which involves the use of options and futures. It is also far riskier,” he said.
The Chicago Board of Options Exchange (CBOE) first introduced a volatility index for the American markets in 1993, based on the S&P 100 Index. The methodology was revised in 2003 and a new index created, this time based on the S&P 500 Index options.
Globally, contracts based on the VIX are among the most traded derivatives for the CBOE. In August, there were 3,488,149 VIX futures contracts traded on the exchange. It was up 83 per cent over August last year and 19 per cent over the previous month, according to a note on the exchange website.