Volatility is often described as the “rate and magnitude of
changes in prices” and in finance often referred to as risk. Volatility Index
is a measure, of the amount by which an underlying Index is expected to fluctuate,
in the near term, (calculated as annualised volatility, denoted in percentage
e.g. 20%) based on the order book of the underlying index options.
Volatility index is a widely used tool in the financial
industry as it serves as an indicator of the level of uncertainty or risk in
the market. Some of the key uses of volatility index are:
Predicting market trends: The volatility index helps traders
and investors in predicting the future movement of the market. Higher levels of
volatility indicate a greater degree of uncertainty and a higher risk of price
fluctuations.
Hedging strategies: Volatility index can be used as a tool
for hedging against market risk. For example, investors can use options
contracts to protect their portfolio against market volatility.
Risk management: Volatility index can help investors in
managing their risk exposure. It provides insights into the level of risk in
the market and helps investors in adjusting their positions accordingly.
Portfolio diversification: Volatility index can be used as a
tool for diversification of the investment portfolio. It can help investors in
identifying assets with low correlation to the stock market and thus, reduce
overall portfolio risk.
Trading strategies: Traders can use the volatility index as
a trading tool to identify opportunities for profit. For example, they can use
high volatility periods to enter trades and low volatility periods to exit
trades.
Overall, volatility index is an important tool for investors and traders to manage their risk exposure and make informed investment decisions.
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