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The S&P/ASX200 VIX (A-VIX), is a financial market product, which is traded based on the implied volatility in the underlying Australian equity index.
The A-VIX is a market instrument pricing investor sentiment and market expectations. A relatively high A-VIX value implies that the market expects significant changes in the S&P/ASX 200 over the next 30 days, while a relatively low A-VIX value implies that the market expects minimal change. The ASX chart below illustrates this relationship.
Similarly, when the A-VIX is at relatively high levels, investor sentiment prices in high uncertainty.
Conversely, when the A-VIX is at relatively low levels, it implies low uncertainty.
Instruments such as the A-VIX are often perceived to show characteristics of mean reversion by oscillating around a long-term average (or mean). In other words, a move away from the long-term average towards high or low extremes is usually followed by a move back towards the long-term average.
The implication is that high levels of volatility may be followed by a return to more normal volatility levels, and low levels of volatility may be precursors to an increase in volatility.
The A-VIX is reported as an annualized standard deviation percentage that can be converted to a shorter time period. For instance, an A-VIX value of 20% can be converted to a monthly figure, remembering that volatility scales at the square root of time, the formula is:
20% x √1/12 = 5.77%
In the above example, index options over the S&P/ASX 200 are incorporating the potential for a one standard deviation return over the next month of +/- 5.77%.
The S&P/ASX 200 VIX Futures (A-VIX futures) is an exchange-traded tool available on ASX designed specifically to manage and trade anticipated changes in Australian equity market volatility in a single transaction. Refer to ASX for an ASX VIX Futures fax sheet. [1]
With S&P/ASX 200 VIX Futures you can more easily hedge, trade and arbitrage anticipated volatility in the Australian equity market. Other uses include:
For example:
Passive management is an investing strategy that tracks a market-weighted index or portfolio. Passive management is most common on the equity market, where index funds track a stock market index, but it is becoming more common in other investment types, including bonds, commodities and hedge funds.
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VIX is the ticker symbol and the popular name for the Chicago Board Options Exchange's CBOE Volatility Index, a popular measure of the stock market's expectation of volatility based on S&P 500 index options. It is calculated and disseminated on a real-time basis by the CBOE, and is often referred to as the fear index or fear gauge.
Currency overlay is a financial trading strategy or method conducted by specialist firms who manage the currency exposures of large clients, typically institutions such as pension funds, endowments and corporate entities. Typically the institution will have a pre-existing exposure to foreign currencies, and will be seeking to:
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Betashares is an Australian provider of exchange-traded funds (ETFs). The company manages the broadest range of ETFs in Australia across major assets classes. Betashares is based in Sydney, Australia with offices in Melbourne, Brisbane and Perth.
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