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Business News/ Market / Stock-market-news/  BSE to start volatility index following NSE launch
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BSE to start volatility index following NSE launch

BSE to seek Sebi's approval within two weeks to introduce volatility index

National Stock Exchange’s NVIX witnessed a volume of Rs325 crore on the first day and saw 227 members trading the new product, the exchange said in a release. Photo: Hemant Mishra/MintPremium
National Stock Exchange’s NVIX witnessed a volume of Rs325 crore on the first day and saw 227 members trading the new product, the exchange said in a release. Photo: Hemant Mishra/Mint

Mumbai: National Stock Exchange (NSE) on Wednesday started trading futures tied to its VIX volatility index, while rival BSE said it will seek the capital markets regulator’s approval within two weeks to introduce similar contracts.

National Stock Exchange’s NVIX witnessed a volume of 325 crore on the first day and saw 227 members trading the new product, the exchange said in a release.

Three weekly futures contracts of NVIX shall be made available for trading and these contracts will expire on every Tuesday. The exchange has also announced a rebate on transaction charges for trades in NVIX, which will apply from 31 March.

Following NSE’s introduction, BSE also said that it was working on introducing a volatility index futures contract.

“We are discussing with our partner S&P (Standard & Poor’s)," said BSE chief executive officer Ashishkumar Chauhan. “We may file our papers with Sebi (Securities and Exchange Board of India) in around couple of weeks," Chauhan said, suggesting that BSE, Asia’s oldest exchange, would consider a futures contract linked to its existing volatility index, the REALVOL Index.

Even as exchanges rush to introduce products to shield investors from the risk of volatility, the underlying volatility index VIX, which indicates the investor’s perception of the market’s volatility in the near term, hit the lowest level in almost a year, hinting at limited swings in the immediate future. The VIX index, which was introduced in 2009, touched an intra-day low of 13.237, the lowest since March 2013.

NSE’s benchmark 50-share Nifty measures the direction of the market and is computed using the price movement of the underlying stocks, whereas India VIX measures the expected volatility and is computed using the underlying Nifty options. While NSE’s benchmark index Nifty is denoted in points, VIX is denoted as an annualized percentage.

NSE handles more than 90% of India’s equity derivatives turnover and 75% of the cash market, according to Bloomberg.

“There were a lot of enquiries for the product. Institutional investors and brokerage firms’ proprietary desks are using it as a hedging tool," said Rikesh Parikh, vice-president of equities at Motilal Oswal Securities Ltd.

Parikh was optimistic about the prospects of the new contract as general elections are round the corner, which could lead to increased volatility in the equity markets.

“Going into the elections, when we could see more volatile times in the market, VIX futures could prove to be a good tool to hedge against the wide swings in the market," he added.

India VIX is computed using the best bid and ask quotes of the out-of-the-money near and mid-month Nifty option contracts.

An out of the money option contract would either have a call option with a strike price that is higher than the market price of the underlying asset, or a put option with a strike price that is lower than the market price of the underlying asset.

Generally, India VIX starts to rise at times of stress in the markets and falls as investors become calm, and is perceived to be one of the best tools to predict near-term market volatility, Bank of America-Merrill Lynch said in a 12 February note.

“The correlation between Nifty and VIX over the last five years is negative 0.84, a significantly high number, making it a strong indicator for prediction of stress in markets," analysts Bank of America Merrill Lynch analysts Jyotivardhan Jaipuria and Anand Kumar said in the note.

While market participants are enthusiastic about NSE and BSE introducing such products, they add that investors are yet to understand such products completely.

“If BSE is also coming up with a product in this category, the competition is going to be more than welcome by investors. The tool is going to be used primarily for hedging purposes. Most interest will come from the institutional segment," said Sahaj Agrawal, deputy vice-president, derivatives research at Kotak Securities Ltd.

“The trading appetite is quite good for new products, but it needs to be properly understood first. It (NVIX) is a complex product," Agrawal added.

The minimum contract value of NVIX is set at 10 lakh for now, which along with the complex nature of the product could act as a dampener for retail investors.

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Published: 26 Feb 2014, 02:03 PM IST
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