SENSEX REALIZED VOLATILITY INDEX

ABOUT THE INDEX

The first of its kind in India, the SENSEX Realized Volatility (REALVOL) Index provides market participants with an accurate measure of the historic volatility of the SENSEX over fixed 1, 2, and 3-month time horizons, which are synchronized with BSEs 1, 2, and 3-month futures & options expiration cycles. Each index is reset at the end of its respective cycle. The SENSEX REALVOL will be a useful tool for option traders attempting to manage risk, as their P&L is driven by the difference between realized and implied volatility. Products based on the REALVOL family of indices will allow Indian traders to hedge against sudden price movements (hence reducing Gamma exposure) and take directional bets on the realized volatility of the SENSEX. ____________

INDEX METHODLOGY
The formula for realized volatility uses continuously compounded daily returns assuming a mean daily price return of zero. The summation of the squared daily returns is annualized, assuming that there are 252 business days per year. The following is the formula used to calculate the th value of the SENSEX REALVOL index on the n day of the indexs underlying option expiry cycle:

PRACTICAL APPLICATIONS
The SENSEX Realized Volatility family of indices has several practical uses: Can be used to create derivative products enabling traders to make directional bets on volatility, profit from volatility arbitrage trades, and hedge gamma exposure Can be used to measure the difference in expected and actual volatility, allowing traders to better measure and mitigate market risk Can be used to Improve volatility and correlation forecasts useful for portfolio allocation and risk management

Where, n = n day of the underlying option expiry cycle; resets to 1 at the start of a new cycle
th

CONTACT US
Rt = ln(Pt/Pt-1) = One-day log return of the SENSEX Pt = Closing value of the BSE SENSEX on the t day of the option expiry cycle.
th

For more information and inquiries regarding product licensing, please contact us: Web: www.bseindia.com/realvol Email: index.services@bseindia.com Direct: +91 22 2272 8176

FREQUENTLY ASKED QUESTIONS

1) What is realized volatility? Realized volatility is the standard deviation of daily log returns of the price of an asset over a fixed, historic time period. It is used to quantify the risk of a financial instrument over a period of time, as actually observed in the market. 2) How does realized volatility differ from implied volatility, another common volatility measure? Realized volatility (also commonly referred to as actual, historic or market volatility) measures the actual observed volatility of the price of an asset, whereas implied volatility measures the markets expectation of future volatility. Realized volatility is calculated using actual price movements of the underlying asset, whereas implied volatility is derived from option prices, using an option pricing formula such as Black-Scholes. 3) Which measure is more useful to market participants? Both measures are useful tools for market participants, researchers, and other stakeholders. Realized volatility contracts allow traders to manage the risk of sudden price movements (Gamma risk), a risk that cannot currently be mitigated by implied volatility contracts alone. 4) What is the SENSEX Realized Volatility Index? The SENSEX Realized Volatility (REALVOL) Index is a realized volatility index based on the daily log returns of the SENSEX. It measures the actual, observed volatility of the BSE SENSEX over fixed time horizons that match BSEs 1, 2, and 3-month futures & options expiry cycles. 5) What REALVOL indices are disseminated? 9) Where can I obtain more information? BSE currently publishes 1, 2, and 3-month REALVOL indices based on the SENSEX. The methodology can be extended to other time horizons and assets. Web: www.bseindia.com/realvol Email: index.services@bseindia.com 6) How is the SENSEX REALVOL index calculated? Currently, BSE calculates the index on a daily basis using an annualized standard deviation formula based on the daily log-returns of the SENSEX, assuming a mean daily return of zero. 7) Why is the SENSEX REALVOL index synchronized to BSEs F&O expiry cycle? BSE intends to launch derivative contracts on realized volatility. When matched with SENSEXs F&O expiry cycles, these contracts will be useful tools for traders and other market participants to hedge their risk in SENSEX F&O contracts and make active, directional bets on actual volatility. In order to measure the actual realized volatility of the underlying asset of an F&O contract, the REALVOL index must only measure price variation over the life of the F&O contract. The index must therefore reset at each expiration date. 8) What are the practical applications of the SENSEX REALVOL index? The SENSEX REALVOL index can be used as the underlying for F&O contracts which will allow traders to hedge gamma exposure, speculate on volatility, and engage in volatility arbitrage trades. Financial institutions can also use the index to launch structured products like variance swaps and volatility swaps where the floating leg of the swap will pay the value of the realized volatility index on expiry. Market participants can also use the SENSEX REALVOL to track changes in historic volatility and measure differences between implied and realized volatility, increasing their ability to measure and mitigate market risk.