3. What does the VIX measure? And how

Expert Solution

VIX is the Volatility Index. It is a predictive measure of implied volatility which measures the expected price changes in S&P500 index options over the next 30 day period.

1. Options to be included in the calculation are selected. They are a range of call and put strikes in two consecutive expiry horizons around the 30-day time period. Since the time horizon is 30 days, two consecutive expiry horizons with more than 23 days and less than 37 days is used. These are known as the 'near-term' and the 'next-term'. When near-term options have less than 24 days to expiry then they are discarded and the next-term becomes the new near term. The next available expiry horizon is then, used as the new next-term. This is a weekly rollover.

2. Each option's variance which makes up the total variance of its expiration is calculated.

3. The total variance for the first and second expiration is calculated.

4. Then the 30-day variance is calculated by interpolating the two variances.

5. The square root of this variance is taken to get the standard deviation and then, multiplied by 100, to finally, get the VIX.

jeff jeffy answered 1 year ago

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