Name: Priyanshi Gupta Mobile No.

: +91-9912633488

Enrollment Id: 10BSPHH010572 Email Id: priyanshi.gupta@gmail.com

Name: Pratik Tibrewala Mobile No.: +91-81431774470

Enrollment Id: 10BSPHH010548 Email Id: pratiktibrewala@gmail.com

SIP Report
Summer Internship Program At Edelweiss Financial Advisors On Analyzing VIX (Volatility Index) of Nifty and forming trading strategies using INDIA VIX.
Submitted To :Submitted By:Vishwanathan Iyer Tibrewala Asstt. Prof. (Finance&Accounting) 10BSPHH010548 IBS Hyderabad

Pratik

ICFAI BUSINESS SCHOOL, HYDERABAD

Date of Submission: May 20, 2011

AUTHORISATION
The project report titled as Analyzing VIX (Volatility Index) of Nifty and forming trading strategies using INDIA VIX. has been authorized by Edelweiss Financial Advisors as a part of the evaluation for Summer Internship Program. The project has been submitted as a partial fulfillment of the requirement of Masters of Business Administration (MBA) Program of IBS, Hyderabad.

Submitted By: Pratik Tibrewala (10BSPHH010548)

Submitted To: Vishwanathan Iyer Asstt. Prof. (Finance&Accounting) IBS Hyderabad

Mr. Anil Thakur REGIONAL HEAD MANAGER Edelweiss Financial Advisors

ACKNOWLEDGEMENT
Summer Internship Program (SIP) aims to provide every student with an opportunity to apply theoretical concepts to the real business scenarios. The wealth of knowledge and experiences shared by all involved in completion of successful internship is invaluable. I feel privileged to be associated with Edelweiss Financial Advisors. I would like to put on record my deep sense of gratitude towards the organization for providing me with this unique learning experience and the requisite infrastructure. This report has been made possible because of the support and guidance of many people. I am grateful to Mr. Anil Thakur (Regional Head Manager), I express sincere gratitude to my company guide and mentor for his encouragement, support and valuable guidance throughout the project duration. The project was quite unknown to me and required lot of knowledge and guidance. In spite of being fraught with unending engagements in office, he kept me motivating to try best at all times. I am also thankful to Mr. Srinivas who helped me in creating the basic knowledge base required for the project and motivating me throughout my SIP duration. I would like to take this opportunity to thank Prof. Viswanathan Iyer - Faculty Guide, IBS Hyderabad, for being a very supportive and helpful. His constant motivation and willingness to help at any point of time have been key factors in the successful completion of the report. At this point of time, I would also like to thank all members at Edelweiss Financial Advisors, friends and my family who provided me valuable insights and have been very supportive and friendly in providing an environment for learning. Lastly, I would like to thank IBS, Hyderabad and Edelweiss Financial Advisors, Hyderabad for providing me an opportunity to gain hands-on experience by working in a corporate environment.

TABLE OF CONTENTS
PAGE NO. AUTHORIZATION ACKNOWLEDGEMENT EXECUTIVE SUMMARY INTRODUCTION MAIN TEXT OBJECTIVE METHODOLOGY ANALYSIS LIMITATIONS OF THE STUDY CONCLUSION FINDINGS ANNEXTURE REFERENCES 2 3 6 7 27 27 28 29 31 32 34 35 56

LIST OF ILLUSTRATIONS
PAGE NO. CORRELATION WEEK1 WEEK2 WEEK3 WEEK4 WEEK5 MONTH1 MONTH2 MONTH3 HALFYEAR1 HALF YEAR2 TOTAL HISTORICAL VOLATILITY VS VIX 35 36 36 36 37 37 37 38 38 38 39 39 40

EXECUTIVE SUMMARY
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This project has been carried out to understand the computation of CBOES Volatility Index (VIX). This research was carried out to understand the application of VIX and analyse how VIX can be used in trading in the financial markets. The India VIX is computed on similar lines with CBOE VIX with certain changes. The various factors which affect the India VIX has been explained with proper examples which help in understanding the application of VIX. The various trading strategies which use VIX has been explained and their use has been statistically tested to show their use in trading in the equity markets. The VIX 5% Rule and the negative correlation between the India VIX and Nifty has been explained. The research can be of great help to the investors and traders to trade more efficiently and earn better profits. The VIX 5% rule is tested using the data of India VIX and Nifty using M S Excel and the correlation between the India VIX and Nifty has been calculated by simple linear correlation. The analysis of the data shows that the strategy works on majority of trading sessions and the buy and sell signals generated were found to be correct with big moves. The correlation calculated was calculated for various durations were negative for all durations. This negative correlation can be used for hedging portfolios. With the help of this project investors will be benefited with detailed information about the derivative market in India and new developments in the Indian derivative market. This will prepare them for future developments in Indian markets and gain from it. VIX and derivatives based on it are gaining popularity in developed markets of the world and will soon be launched in India so prior knowledge and information on how to use these can give investors a better chance to gain from it.

INTRODUCTION

INDUSTRY BACKGROUND Brokerage

Brokerage firms are the business entities that deal with stock trading. India, having an increasing capital market and a growing number of investors, has a number of brokerage firms. In Indian retail brokerage industry, the brokerage firms primarily work as agents for buying and selling of securities like shares, stocks and other financial instruments and earn commission for each of the transactions. The industry is one of the most important provider classes in the wealth management space in the countryvertically cutting across all customer segments and horizontally cutting across all asset classes. Indian retail brokerage market is going through a wonderful phase with high growth rate. The total trading volume of the Indian brokerage companies stood at US$ 1239.1 billion in the year 2004, which increased to US$ 1492.1 billion in 2005. It is further expected to reach US$ 6535.7 billion by the year 2015. Brokerage houses in India are trying to adopt a multi-modal distribution model to increase market share. Firms are trying to graduate up the value chain to increase profitability and create a new platform for positioning themselves as wealth managers. Brokerages are increasingly trying to strike a balance between addressing customer segments profitably and grabbing market share by repositioning themselves on a suitable wealth management platform.

Financial Advisor
A professional who helps individuals manage their finances by providing advice on money issues such as investments, insurance, mortgages, college savings, estate planning, taxes and retirement, depending on what the client requests. Some financial advisers are paid a flat fee for their advice, while others earn commissions from the investments they sell to their clients. Feeonly arrangements are widely regarded to be better for the client.

COMPANY BACKGROUND

Anagram Capital Ltd.(Anagram) is amongst the leading retail broking houses in India. It is engaged in offering comprehensive personal finance solutions since 1994. Anagram offers a wide range of services for the discerning equity investor, in addition to online account access and real time trading. The company is a part of the Edelweiss Group. Edelweiss is one of the leading integrated financial services companies in India. Market and Network Anagram has membership in all the leading stock and commodities exchanges in the country. The firm is a member in NSE, BSE, NCDEX and MCX. It is a depository participant with NSDL. Anagram has its roots in Western India and has established nationwide presence with 169 branches, 1,360 sub-brokers, 2,556 terminals and a professional team of 2,000 plus employees spread across major metros and states in the country. It also provides trading in futures and options through its online portal www.anagram.co.in Areas of Expertise Anagram offers real time trading opportunities on the BSE as well as the NSE. It also offers depository and online services to clients for account accessing and information through its online portal catering to the needs of mobile trader as well as the net savvy investor. Anagram offers state-of theart online trading through its website (www.anagram.co.in). Regular updates during trading hours, and access to information, analysis and research, and a range of monitoring tools is available. The company has steadily building up a comprehensive portfolio of products and services apart from conventional broking. High speed anywhere trading through the net, online depository services, commodities trading and retail debt products are increasingly areas of special emphasis for the company. Research Anagram is a research driven organization. Daily Call is its morning newsletter that takes a trading call on the market and gives a ringside view of the overnight national and international events. Customers get real time feeds on news, comments and recommendations through instant messaging that are of utmost essence to the serious trader. The Weekly Watch delivered to all the clients every Saturday evening is the most comprehensive reports of its kind. The report summons developments over the past week, major economic talking points, summary on derivatives markets, technical outlook and trading ideas for the forthcoming week and fundamental investments with an exhaustive research report for a medium to long term horizon. On the commodities side, it releases daily and weekly reports providing outlook on international agri-commodities. Insurance Life Insurance Products are absolutely necessary like providing Shelter for your family or education to your children. Life Insurance is the only financial instruments which take care of

the standard of living and financial stability to the family in case of eventuality of disability or death. The Main qualities of Insurance are Safety, Protection and Return. Life Insurance is the only product which covers you during all cycles of your life and beyond. It is important to plan while you are earning, to safeguard yourself and your family against all unexpected odds.Our Services available at ZERO Cost through our Pan India Network branches Mutual Funds Anagram provides a host of services for customers investing in mutual funds. It offers wide range of services like, rankings of different mutual fund schemes, list of new schemes issued in the market, interviews with fund managers, Insta-Nav a quick search based application that enables customers to get the related information about the desired scheme, Primer a brief description about mutual funds, RBI procedural guidelines and a Risk Profiler which helps the customers in ascertaining ones own profile, thus minimizing risk. Advisory Services Apart from broking business, Anagram is also engaged in offering advisory services of investments into mutual funds, primary market, life insurance and other small saving products. The distribution services add up to their broking business and are serviced by experts at each location. The business is supported by an efficient research and back office team. Anagrams set of diligent advisors helps its customers plan and get more out of ones money. The schemes include, fixed income, bank fixed deposits, company fixed deposits, small savings schemes, tax saving schemes and NRI deposits. Anagram also provides tax planning services where a list of tax saving schemes and a forum for Q&A where the queries are answered by the tax advisors; and an NRI advisory body, where it provides information for NRIs in helping them makes judicious investment decisions. Loan Advisory Anagram also provides advisory services on the loan schemes of certain banks to its customers. The schemes include, home loans, adhoc loans, professional loans, educational loans, consumer loans and auto loans. Its advisory services are classified into four categories namely; Primers giving an overview about all schemes that are available, Calculators where it helps the customers with quick calculators, Jargon Buster a translator and Digital Advisors which help in making decisions easy. It has entered into partnership with many leading banks in providing this facility. Performance The company registered strong growth during the first 10 months of 2007. The company added 26,460 domestic customer accounts in 2007 as compared to 25,295 in 2006. Number of terminals, sub brokers and employees almost doubled during this period. Growth Areas Anagram has diversified its business to other areas such as portfolio management services and is
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looking forward at opening overseas branches. It plans to introduce company fixed deposits and merchant banking to its current offerings. It is also aiming at increasing their institutional client base, acquiring new business/brokerage firms and also entering into joint venture operations in the near future.

SECURITIES MARKET IN INDIAAN OVERVIEW

The securities markets in India have witnessed several policy initiatives, which has refined the market micro-structure, modernised operations and broadened investment choices for the investors. The irregularities in the securities transactions in the last quarter of 2000-01, hastened the introduction and implementation of several reforms. While a Joint Parliamentary Committee was constituted to go into the irregularities and manipulations in all their ramifications in all transactions relating to securities, decisions were taken to complete the process of demutualisation and corporatisation of stock exchanges to separate ownership, management and trading rights on stock exchanges and to effect legislative changes for investor protection, and to enhance the effectiveness of SEBI as the capital market regulator. Rolling settlement on T+5 basis was introduced in respect of most active 251 securities from July 2, 2001 and in respect of balance securities from 31s t December 2001. Rolling settlement on T+3 basis commenced for all listed securities from April 1, 2002 and subsequently on T+2 basis from April 1, 2003. All deferral products such as carry forward were banned from July 2, 2002. At the end of March 2008, there were 1,381 companies listed at NSE and 1,236 companies were available for trading. The Capital Market segment of NSE reported a trading volume of Rs.35,51,038 crore during 2007-08 and at the end of March 2008, the NSE Market Capitalisation was Rs.48,58,122 crore. The derivatives trading on the NSE commenced with the S&P CNX Nifty Index Futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and trading in options on individual securities commenced on July 2, 2001. Single stock futures were launched on November 9, 2001. Thereafter, a wide range of products have been introduced in the derivatives segment on the NSE. The Index futures and options are available on Indices - S&P CNX Nifty, CNX Nifty Junior, CNX 100, CNX IT, Bank Nifty and Nifty Midcap 50.Single stock futures are available on more than 250 stocks. The mini derivative contracts (futures and options) on S&P CNX Nifty were introduced for trading on January 1, 2008 while the Long term Options Contracts on S&P CNX Nifty were launched on March 3, 2008.

Due to rapid changes in volatility in the securities market from time to time, there was a need felt for a measure of market volatility in the form of an index that would help the market
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participants. NSE launched the India VIX, a volatility index based on the S&P CNX Nifty Index Option prices. Volatility Index is a measure of markets expectation of volatility over the near term. Other than the introduction of new products in the Indian stock markets, the Indian Stock Market Regulator, Securities & Exchange Board of India (SEBI) allowed the direct market access (DMA) facility to investors in India on April 3, 2008. To begin with, DMA was extended to the institutional investors. In addition to the DMA facility, SEBI also decided to permit all classes of investors to short sell and the facility for securities lending and borrowing scheme was operationalised on April 21, 2008.

The Debt markets in India have also witnessed a series of reforms, beginning in the year 200102 which was quite eventful for debt markets in India, with implementation of several important decisions like setting up of a clearing corporation for government securities, a negotiated dealing system to facilitate transparent electronic bidding in auctions and secondary market transactions on a real time basis and dematerialisation of debt instruments. Further, there was adoption of modified Delivery-versus-Payment mode of settlement (DvP III in March 2004). The settlement system for transaction in government securities was standardized to T+1 cycle on May 11, 2005. To provide banks and other institutions with a more advanced and more efficient trading platform, an anonymous order matching trading platform (NDS-OM) was introduced in August 2005. Short sale was permitted in G-secs in 2006 to provide an opportunity to market participants to manage their interest rate risk more effectively and to improve liquidity in the market. When issued (WI) trading in Central Government Securities was introduced in 2006. As a result of the gradual reform process undertaken over the years, the Indian G-Sec market has become increasingly broad-based and characterized by an efficient auction process, an active secondary market, electronic trading and settlement technology that ensures safe settlement with Straight through Processing (STP). We have taken the stock market developments since 1990. These developments in the securities market, which support corporate initiatives, finance the exploitation of new ideas and facilitate management of financial risks, hold out necessary impetus for growth,development and strength of the emerging market economy of India.

INTRODUCTION TO DERIVATIVES

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The emergence of the market for derivative products, most notably forwards, futures and options, can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking-in asset prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. However, by locking in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of riskaverse investors. Derivative products initially emerged as hedging devices against fluctuations in commodity prices, and commodity-linked derivatives remained the sole form of such products for almost three hundred years. Financial derivatives came into spotlight in the post-1970 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by 1990s, they accounted for about two-thirds of total transactions in derivative products. In recent years, the market for financial derivatives has grown tremendously in terms of variety of instruments available, their complexity and also turnover. In the class of equity derivatives the world over, futures and options on stock indices have gained more popularity than on individual stocks, especially among institutional investors, who are major users of index-linked derivatives. Even small investors find these useful due to high correlation of the popular indexes with various portfolios and ease of use.

DERIVATIVES DEFINED
Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative. The price of this derivative is drive by the spot price of wheat which is the "underlying". In the Indian context the Securities Contracts (Regulation) Act, 1956 (SC(R)A) defines "derivative" to include1. A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security. 2. A contract which derives its value from the prices, or index of prices, of underlying securities. Derivatives are securities under the SC(R)A and hence the trading of derivatives is governed by the regulatory framework under the SC(R)A.
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PARTICIPANTS IN THE DERIVATIVES MARKETS

The following three broad categories of participants - hedgers, speculators, and arbitrageurs trade in the derivatives market. Hedgers face risk associated with the price of an asset. They use futures or options markets to reduce or eliminate this risk. Speculators wish to bet on future movements in the price of an asset. Futures and options contracts can give them an extra leverage; that is, they can increase both the potential gains and potential losses in a speculative venture. Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. If, for example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit.

TYPES OF DERIVATIVES
The most commonly used derivatives contracts are forwards, futures and options which we shall discuss in detail later. Here we take a brief look at various derivatives contracts that have come to be used. Forwards: A forward contract is a customised contract between two entities, where settlement takes place on a specific date in the future at todays preagreed price. Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardised exchange-traded contracts. Options: Options are of two types calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Warrants: Options generally have lives of upto one year, the majority of options traded on options exchanges having maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter. LEAPS: The acronym LEAPS means Long Term Equity Anticipation Securities. These are options having a maturity of upto three years. Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average or a basket of assets. Equity index options are a form of basket options.
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Swaps: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are: Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency Currency Swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction. Swaptions: Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus, swaptions is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an option to pay fixed and receive floating.

SOME OF THE DERIVATIVES IN DETAIL:

Forward Contract A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. The other party assumes a short position and agrees to sell the asset on the same date for the same price. Other contract details like delivery date, price and quantity are negotiated bilaterally by the parties to the contract. The forward contracts are normally traded outside the exchanges.

The salient features of forward contracts are: They are bilateral contracts and hence exposed to counterparty risk. Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality.

The contract price is generally not available in public domain. On the expiration date, the contract has to be settled by delivery of the asset.
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If the party wishes to reverse the contract, it has to compulsorily go to the same counterparty, which often results in high prices being charged.

Forward markets world-wide are afflicted by several problems: - Lack of centralisation of trading, - Illiquidity, and - Counterparty risk

In the first two of these, the basic problem is that of too much flexibility and generality. The forward market is like a real estate market in that any two consenting adults can form contracts against each other. This often makes them design terms of the deal which are very convenient in that specific situation, but makes the contracts non-tradable. Counterparty risk arises from the possibility of default by any one party to the transaction. When one of the two sides to the transaction declares bankruptcy, the other suffers. Even when forward markets trade standardised contracts, and hence avoid the problem of illiquidity, still the counterparty risk remains a very serious issue.

Futures Futures markets were designed to solve the problems that exist in forward markets. A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. But unlike forward contracts, the futures contracts are standardised and exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies certain standard features of the contract. It is a standardised contract with standard underlying instrument, a standard quantity and quality of the underlying instrument that can be delivered, (or which can be used for reference purposes in settlement) and a standard timing of such settlement. A futures contract may be offset prior to maturity by entering into an equal and opposite transaction. More than 99% of futures transactions are offset this way.

The standardised items in a futures contract are: Quantity of the underlying Quality of the underlying
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The date and the month of delivery The units of price quotation and minimum price change Location of settlement

Options Options are fundamentally different from forward and futures contracts. An option gives the holder of the option the right to do something. The holder does not have to exercise this right. In contrast, in a forward or futures contract, the two parties have committed themselves to doing something. Whereas it costs nothing (except margin requirements) to enter into a futures contract, the purchase of an option requires an upfront payment.

There are two basic types of options, call options and put options. Call option: A call option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price. Put option: A put option gives the holder the right but not the obligation to sell an asset by a certain date for a certain price.

American options: American options are options that can be exercised at any time upto the expiration date. Most exchange-traded options are American. European options: European options are options that can be exercised only on the expiration date itself. European options are easier to analyse than American options, and properties of an American option are frequently deduced from those of its European counterpart.

DERIVATIVES MARKET IN INDIA

The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws (Amendment) Ordinance, 1995, which withdrew the prohibition on options in securities. The market for derivatives, however, did not take off, as there was no regulatory
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framework to govern trading of derivatives. SEBI set up a 24-member committee under the Chairmanship of Dr. L. C. Gupta on November 18, 1996 to develop appropriate regulatory framework for derivatives trading in India. The committee submitted its report on March 17, 1998 prescribing necessary preconditions for introduction of derivatives trading in India. The committee recommended that derivatives should be declared as securities so that regulatory framework applicable to trading of securities could also govern trading of securities. SEBI also set up a group in June 1998 under the chairmanship of Prof. J. R. Varma, to recommend measures for risk containment in derivatives market in India. The report, which was submitted in October 1998, worked out the operational details of margining system, methodology for charging initial margins, broker net worth, deposit requirement and real-time monitoring requirements. The SCRA was amended in December 1999 to include derivatives within the ambit of securities and the regulatory framework was developed for governing derivatives trading. The act also made it clear that derivatives shall be legal and valid only if such contracts are traded on a recognised stock exchange, thus precluding OTC derivatives. The government also rescinded in March 2000, the three-decade old notification, which prohibited forward trading in securities. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2000. SEBI permitted the derivatives segments of two stock exchanges NSE and BSE, and their clearing house corporation to commence trading and settlement in approved derivatives contracts. To begin with, SEBI approved trading in index futures contracts based on S&P CNX Nifty and BSE-30 (Sensex) index. This was followed by approval for trading in options which commenced in June 2001 and the trading in options on individual securities commenced in July 2001. Futures contracts on individual stocks were launched in November 2001. Futures and Options contracts on individual securities are available on more than 200 securities. Trading and settlement in derivative contracts is done in accordance with the rules, byelaws, and regulations of the respective exchanges and their clearing house/ corporation duly approved by SEBI and notified in the official gazette.

NSE's DERIVATIVES MARKET

The derivatives trading on the NSE commenced with S&P CNX Nifty Index futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and trading in options on individual securities commenced on July 2, 2001. Single stock futures were launched on November 9, 2001. Today, both in terms of volume and turnover, NSE is the largest derivatives exchange in India. Currently, the derivatives contracts have a maximum of 3-month expiration
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cycles. Three contracts are available for trading, with 1 month, 2 months and 3 months expiry. A new contract is introduced on the next trading day following the expiry of the near month contract.

VOLATILITY IN STOCK MARKET

The relative rate at which the price of a security moves up and down. Volatility is found by calculating the annualized standard deviation of daily change in price. If the price of a stock moves up and down rapidly over short time periods, it has high volatility. If the price almost never changes, it has low volatility.

Investors care about volatility for five reasons. 1) The wider the swings in an investment's price the harder emotionally it is to not worry. 2) When certain cash flows from selling a security are needed at a specific future date, higher volatility means a greater chance of a shortfall. 3) Higher volatility of returns while saving for retirement results in a wider distribution of possible final portfolio values. 4) Higher volatility of return when retired gives withdrawals a larger permanent impact on the portfolio's value. 5) Price volatility presents opportunities to buy assets cheaply and sell when overpriced. In today's markets, it is also possible to trade volatility directly, through the use of derivative securities such as options and variance swaps

HISTORICAL VOLATILITY The realized volatility of a financial instrument over a given time period. Generally, this measure is calculated by determining the average deviation from the average price of a financial instrument in the given time period. Standard deviation is the most common but not the only way to calculate historical volatility. This measure is frequently compared with implied volatility to determine if options prices are over- or undervalued. Historical volatility is also used in all types of risk valuations. Stocks with a high historical volatility usually require a higher risk tolerance. Historical Volatility is a measure of price fluctuation over time. Historical volatility uses historical (daily, weekly, monthly, quarterly, and yearly) price data to empirically measure the volatility of a market or instrument in the past. The value rendered by a historical volatility study is the standard deviation of bar-to-bar price differences.
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Formula: Standard Deviation, or Historical Volatility:

Where: s = standard deviation, or historical volatility n = number of occurrences (bars) m = mean xi = price changes And: Mean:

Where: m = mean n = number of occurrences xi = price changes And: xi can equal percent of price change:

Or:

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xi can equal natural logarithmic price change:

THE CBOE VOLATILITY INDEX VIX

The CBOE Volatility Index(VIX) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility. In 1993, the Chicago Board Options Exchang (CBOE) introduced the CBOE Volatility Index, VIX, which was originally designed to measure the markets expectation of 30day volatility implied by at-the-money S&P 100 Index (OEX) option prices. VIX soon became the premier benchmark for U.S. stock market volatility. It is regularly featured in the Wall Street Journal, Barrons and other leading financial publications, as well as business news shows on CNBC, Bloomberg TV and CNN/Money, where VIX is often referred to as the fear index. Ten years later in 2003, CBOE together with Goldman Sachs, updated the VIX to reflect a new way to measure expected volatility, one that continues to be widely used by financial theorists, risk managers and volatility traders alike. The new VIX is based on the S&P 500 Index (SPXSM), the core index for U.S. equities, and estimates expected volatility by averaging the weighted prices of SPX puts and calls over a wide range of strike prices. By supplying a script for replicating volatility exposure with a portfolio of SPX options, this new methodology transformed VIX from an abstract concept into a practical standard for trading and hedging volatility. Futures on VIX, CBOE's trademark Market Volatility Index, provide a pure play on implied volatility independent of the direction and level of stock prices. VIX futures may also provide an effective way to hedge equity returns, to diversify portfolios, and to spread implied against realized volatility.

Timeline of some key events in the history of the VIX Index:

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1993 The VIX Index is introduced in a paper by Professor Robert E. Whaley of Duke University. 2003 Methodology for VIX is revised. 2004 On March 26, 2004, the first-ever trading in futures on the VIX Index began on CBOE Futures Exchange (CFE). 2006 VIX options launched in February 2006. 2008 VIX Binary Options introduced. 2009 Mini-VIX futures introduced. 2010 Weekly options on VIX futures introduced.

INTRODUCTION OF VIX IN INDIA

Volatility Index is a measure of markets expectation of volatility over the near term. 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. India VIX is a volatility index based on the NIFTY Index Option prices. From the best bid-ask prices of NIFTY Options contracts, a volatility figure (%) is calculated which indicates the expected market volatility over the next 30 calendar days. India VIX uses the computation methodology of CBOE, with suitable amendments to adapt to the NIFTY options order book using cubic splines, etc. India VIX is a volatility index based on the index option prices of NIFTY. India VIX is computed using the best bid and ask quotes of the out-of-the-money near and mid-month NIFTY option contracts which are traded on the F&O segment of NSE. India VIX indicates the investors perception of the markets volatility in the near term. The index depicts the expected market volatility over the next 30 calendar days. i.e. higher the India VIX values, higher the expected volatility and vice-versa.

India VIX computation methodology

India VIX uses the computation methodology of CBOE, with suitable amendments to adapt to the NIFTY options order book using cubic splines, etc
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The factors considered in the computation of India VIX are mentioned below: 1) Time to expiry: The time to expiry is computed in minutes instead of days in order to arrive at a level of precision expected by professional traders. 2) Interest Rate: The relevant tenure NSE MIBOR rate (i.e 30 days or 90 days) is being considered as risk-free interest rate for the respective expiry months of the NIFTY option contracts 3) The forward index level: India VIX is computed using out-of-the-money option contracts. Out-of-the-money option contracts are identified using forward index level. The forward index level helps in determining the at-the-money (ATM) strike which in turn helps in selecting the option contracts which shall be used for computing India VIX. The forward index level is taken as the latest available price of NIFTY future contract for the respective expiry month. 4) Bid-Ask Quotes The strike price of NIFTY option contract available just below the forward index level is taken as the ATM strike. NIFTY option Call contracts with strike price above the ATM strike and NIFTY option Put contracts with strike price below the ATM strike are identified as out-of-themoney options and best bid and ask quotes of such option contracts are used for computation of India VIX. In respect of strikes for which appropriate quotes are not available, values are arrived through interpolation using a statistical method namely Natural Cubic Spline After identification of the quotes, the variance (volatility squared) is computed separately for near and mid month expiry. The variance is computed by providing weightages to each of the NIFTY option contracts identified for the computation, as per the CBOE method. The weightage of a single option contract is directly proportional to the average of best bid-ask quotes of the option contract and inversely proportional to the option contracts strike price

Computation of India VIX

The variance for the near and mid month expiry computed separately are interpolated to get a single variance value with a constant maturity of 30 days to expiration. The squareroot of the computed variance value is multiplied by 100 to arrive at the India VIX value.

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Future of India Vix Futures NSE is soon going to start India Vix Futures trading which is going to be the first instrument based on the volatility index for India. Its a very good product and very relevant for the current stock market conditions and also very necessary for the indian markets to have a product based on the market volatility if we want to make India, a developed and matured market. The contract specifications like contract lot size, tick values, margin requirements are not yet out but the real question is whether it is going to attract enough liquidity or not? Right now, there are only two exchanges which have successfully launched instruments on the volatility index in the world, VIX by CBOE and VSTOXX by Eurex. Other exchanges tried but failed to make it popular among the traders. Germanys stock exchange, DTB launched VOLAX futures on DAX in Jan 1998 but has to withdraw the product in the same year in Dec 1998. We may say markets at that time may not be ready to accept this product. CBOE successfully launched VIX Futures in March 2004. CBOE launched DJIA volatility Futures in Apr 2005, continued it for 4 years but has to delist it in Aug 2009. Eurex lists futures on VDAX, VSMI, and VSTOXX in Sep 2005 but has to delist each one of them in Jul 2009. VSTOXX however was relaunched as mini again. CBOE sucessfully lists VIX options. CBOE lists Nasdaq and Russell 2000 volatility futures in Jul 2007 but failed and delist the contracts in Feb 2009 and Feb 2010 respectively. Eurex lists options on VSTOXX in Mar 2010.

Looking at the history of volatility index products in the world arena, there are more failures then successes when it comes to instruments on volatility index and hence there is a huge question mark on whether IndiaVix is going to be successful or not. In India, high market volatility and absence of other developed products to hedge volatility risks may make IndiaVix a success. Some other exchanges are also coming up with volatility futures like VKOSPI futures, Japanese VIX futures.

VIX BASED DERIVATIVES

CBOE Volatility Index (VIX) Futures CONTRACT NAME: CBOE Volatility Index (VIX) Futures
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LISTING DATE: March 26, 2004 DESCRIPTION: The CBOE Volatility Index is based on real-time prices of options on the S&P 500 Index, listed on the Chicago Board Options Exchange (Symbol: SPX), and is designed to reflect investors' consensus view of future (30-day) expected stock market volatility. CONTRACT SIZE: $1000 times the VIX CONTRACT MONTHS: The Exchange may list for trading up to nine near-term serial months and five months on the February quarterly cycle for the VIX futures contract. FINAL SETTLEMENT VALUE: The final settlement value for VIX futures shall be a Special Opening Quotation (SOQ) of VIX calculated from the sequence of opening prices of the options used to calculate the index on the settlement date. The opening price for any series in which there is no trade shall be the average of that option's bid price and ask price as determined at the opening of trading. The final settlement value will be rounded to the nearest $0.01. If the final settlement value is not available or the normal settlement procedure cannot be utilized due to a trading disruption or other unusual circumstance, the final settlement value will be determined in accordance with the rules and bylaws of The Options Clearing Corporation. DELIVERY: Settlement of VIX futures contracts will result in the delivery of a cash settlement amount on the business day immediately following the Final Settlement Date. The cash settlement amount on the Final Settlement Date shall be the final mark to market amount against the final settlement value of the VIX futures multiplied by $1000.00.

CBOE VOLATILITY INDEX(VIX) OPTIONS Underlying: The CBOE Volatility Index - more commonly referred to as "VIX" - is an up-tothe-minute market estimate of expected volatility that is calculated by using real-time S&P 500 Index (SPX) option bid/ask quotes. VIX uses nearby and second nearby options with at least 8 days left to expiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index. Multiplier:$100. Strike Price Intervals: Minimum strike price intervals of not less than $1.00 are permissible, subject to certain conditions. (See CBOE Rule 24.9, Interpretations and Policies .01 for more complete information) Otherwise, strike price intervals shall not be less than $2.50. Strike (Exercise) Prices: In-, at- and out-of-the-money strike prices are initially listed. New strikes can be added as the index moves up or down.

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Premium Quotation: Stated in points and fractions, one point equals $100. Minimum tick for series trading below $3 is 0.05 ($5.00); above $3 is 0.10 ($10.00). Expiration Date: The Wednesday that is thirty days prior to the third Friday of the calendar month immediately following the expiring month. Expiration Months: Up to six contract months may be listed, provided that the time to expiration is no greater than 12 months. Exercise Style: European - CBOE Volatility Index options generally may be exercised only on the Expiration Date. Last Trading Day: The Tuesday prior to the Expiration Date of each month. Settlement of Option Exercise: The exercise-settlement value for VIX options (Ticker: VRO) shall be a Special Opening Quotation (SOQ) of VIX calculated from the sequence of opening prices of the options used to calculate the index on the settlement date. The opening price for any series in which there is no trade shall be the average of that option's bid price and ask price as determined at the opening of trading. Exercise will result in delivery of cash on the business day following expiration. The exercise-settlement amount is equal to the difference between the exercise-settlement value and the exercise price of the option, multiplied by $100. Position and Exercise Limits: No position and exercise limits are in effect. Each member (other than a market-maker) or member organization that maintains an end of day position in excess of 100,000 contracts in VIX for its proprietary account or for the account of a customer, shall report certain information to the Department of Market Regulation. The member must report information as to whether such position is hedged and, if so, a description of the hedge employed e.g. stock portfolio current market value, other stock index option positions, stock index futures positions, options on stock index futures; and for customer accounts, provide the account name, account number and tax ID or social security number. Thereafter, if the position is maintained at or above the reporting threshold, a subsequent report is required on Monday following expiration and when any change to the hedge results in the position being either unhedged or only partially hedged. Reductions below these thresholds do not need to be reported. Margin Purchases of puts or calls with 9 months or less until expiration must be paid for in full. Writers of uncovered puts or calls must deposit / maintain 100% of the option proceeds* plus 15% of the aggregate contract value (current index level x $100) minus the amount by which the option is out-of-the-money, if any, subject to a minimum for calls of option proceeds* plus 10% of the aggregate contract value and a minimum for puts of option proceeds* plus 10% of the aggregate exercise price amount. (*For calculating maintenance margin, use option current market value instead of option proceeds.) Additional margin may be required pursuant to Exchange Rule 12.10.
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TRADING STRATEGIES VIX 5% RULE The proper way to use the VIX is to look at where it is today relative to its 10 day simple moving average. The higher it is above the 10 day moving average, the greater the likelihood the market is oversold and a rally is near. On the opposite side, the lower it is below the 10 day moving average, the more the market is overbought and likely to move sideways-to-down in the near future. This wisdom is further distilled into what TradingMarkets calls The Trading Markets 5% Rul e: Do not buy stocks (or the market) anytime the VIX is 5% below its [10 day simple] moving average. The Same strategy has been applied to Nifty to find out the next day result after breaking either above 5%(Buy Signal) or Below -5% and the strategy is to check the Next day behaiour of Nifty with repect to the Signal. And if VIX falls between -5% to 5% then the very next day it is declared as a Dont Trade Day. HISTORY VIX 5% Rule: Be careful buying stocks anytime VIX is 5% below its MA. Since 1995, S&P 500 has lost money on a net basis 5 days following the times the VIX has been 5% below its 10day MA. Since 1995, whenever VIX has been 5% or more above its 10-day MA, the S&P 500 has achieved returns which are better than 2-1 compared to the average weekly returns of all weeks Edge lies in buying when VIX is at least 5% above its 10-day MA, and locking in gains (and not buying) when VIX is 5% or more below its 10- day MA. When fear is great and VIX is high, we want to be buying. When greed is prevalent and VIX is low, we want to be locking in gains and/or shorting the market. According to experts The 5% rule (according to Larry Connors) basically says to be careful buying anytime the VIX is 5% below its 10 dma because since 1995 the S&P 500 has lost money one a net basis 5 days following the time the VIX has been 5% below its 10 dma. Conversely, whenever the VIX has been 5% or more above its 10 dma, the S&P has achieved returns which are better than 2-1 compared to the average weekly returns or all weeks. All this provides is an edge in timing entries, both long and short. Personally, I take notice when the divergence is 5% or greater . If it goes more than 10% I get

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fairly aggressive. Of course, I must note that my trading style is short term reversion to the mean. At the other end of the spectrum, there are those who favor momentum trading. Its all personal preference and whatever works, go with it. NEGATIVE CORRELATION OF VIX AND UNDERLYING INDEX. The price of VIX often moves in the opposite direction of the underlying index (e.g, when stock prices drop, implied volatility often rises). Investors might explore whether VIX options could be a "catastrophe hedging" tool for stock portfolios. The most notable feature of the VIX is its negative correlation with the price index. This presents immense potential to use the volatility asset class as offered by the VIX as an effective hedging instrument. The negative correlation of VIX with NIFTY makes it an excellent hedging tool. In a low interest rate environment, the need to add portfolio value is intensified for the average investor. The introduction of a volatility asset class that is negatively correlated with equities makes this job a bit easier. For over a decade, investors were intrigued by the VXO, which became know in the press as the "fear gauge", for its ability to measure the amount of anxiety in the equity market, but now there is an opportunity to trade volatility with VIX futures. Volatility-based options and ETFs cannot be far away for the retail investor.

CONCLUSION
Modeling of market volatility is one of the most important issues of recent times. Accurate modeling and forecast of volatility are of immense importance in managing the risk. The current sub-prime crisis has further emphasized the importance of accurate modeling and forecasting of volatility. In the Indian context, the introduction of VIX has helped the traders gauge market sentiments and many traders are already using VIX values for the trading calls. The introduction of trading in VIX index will enable active management of risks that cannot be hedged. The regulator will allow the trading in index as well when the market participants will become comfortable with the index. We believe that the developed instruments like VIX will significantly contribute to the development of the emerging markets like India in the course of time.

MAIN TEXT
OBJECTIVE

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The main objective of my project report is to create an understanding in detail about the derivatives ie. description about derivatives and derivative market in India. The derivative market in India is developing and number of derivative trades is increasing every year and new types of derivatives are being launched every year. An investor needs to keep himself updated about all the latest devlopments in the market to earn greater returns from the market by investing in all possible avenues and take maximum benefit from the possessed market knowledge. My report is trying to help the investors of Edelweiss Financial Advisors, the company for which I was the intern to explain the upcoming asset classes and trends in the financial markets. I am analyzing Volatility Index (VIX) and trying to explain its computation and various factors which are taken into consideration for its computation. VIX is relatively new concept which computes the implied volatility. Implied Volatility helps in understanding the market sentiments which helps to trade in the markets. I am also explaining the various trading strategies which uses VIX and testing them so they can be used by the investors or clients of the company to help them trade in a better way and earn greater returns. I am explaining and testing various strategies such as VIX 5% Rule and negative correlation between VIX and underlying index. I am also making a comparison between the historical volatility and implied volatility which will help the traders in understanding the difference between the two and make correct use of the available information.

METHODOLOGY
The study uses exploratory and descriptive approach. The techniques used will be qualitatative as well as quantitative.
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Qualitative Analysis would include: Detailed analysis of the derivative market in India.
In-depth knowledge of the INDIA VIX and its computation and other foctors which affect it and its properties and future in India.

Quantitative analysis would include:

Testing of the VIX 5% Rule Calculating the historical and comparing it with the implied volatility. Calculating the correlation between INDIA VIX and NIFTY. Data for all the calculations and other use.

Secondary data available on the internet and website of NSE will be used for literature
survey and also to gain an understanding of the philosophy of the derivative market in India .

ANALYSIS
VIX 5% RULE
The proper way to use the VIX is to look at where it is today relative to its 10 day simple moving average. The higher it is above the 10 day moving average, the greater the likelihood the
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market is oversold and a rally is near. On the opposite side, the lower it is below the 10 day moving average, the more the market is overbought and likely to move sideways-to-down in the near future. The VIX 5% Rule was tested using the data of INDIA VIX and Nifty daily returns to check whether the rule stands correct and check whether the trade signals generated by the rule gives the correct result or not. Samples are taken from 02-March-2009 to 28-Feb-2011(486 Trading Sessions) to test the strategy and it found that out of 486 trading sessions VIX has given a buy/sell signal on 283 trading sessions. And out of 283 trading signals, 198 Signals are found accurate with big moves in nifty counting from day high and 85 trading signals are Found inaccurate with Big moves. On testing of the rule we could see that on 58% of the trading sessions it gave a trade signal and 70% of the signals were found to be correct with big moves. From the trading signals its clear that the rule works fine on majority of times and this rule can be followed by the investors to follow this rule and gain maximum benefits from it.

NEGATIVE CORRELATION BETWEEN VIX AND UNDERLYING INDEX. The price of VIX often moves in the opposite direction of the underlying index (e.g, when stock prices drop, implied volatility often rises). Investors might explore whether VIX options could be a "catastrophe hedging" tool for stock portfolios. The most notable feature of the VIX is its negative correlation with the price index. This presents immense potential to use the volatility asset class as offered by the VIX as an effective hedging instrument. The negative correlation of VIX with NIFTY makes it an excellent hedging tool. I have calculated the correlation between the India VIX and NIFTY for different durations and it showed negative correlation for all durations and this can be used by traders to hedge their portfolios by using vix based derivatives.

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DURATION 1 WEEK 1 MONTH 6 MONTHS

CORRELATION -0.4158 -0.724 -0.3395

2-3-2009 TO 28-2- -0.834 2011

As we can see correlation is negative for all the durations.The correlation is significantly high in all durations and is increasing as duration is increasing.This shows the inverse movement relation between the VIX and the underlying price index. COMPARISON OF HISTORICAL AND IMPLIED VOLATILITY. Historical Volatility is a measure of price fluctuation over time. Historical volatility uses historical (daily, weekly, monthly, quarterly, and yearly) price data to empirically measure the volatility of a market or instrument in the past. The value rendered by a historical volatility study is the standard deviation of bar-to-bar price differences.

VIX is a key measure of market expectations of near-term volatility conveyed by stock index option prices. This measure is frequently compared with implied volatility to determine if options prices are over- or undervalued. On comparison of historical volatility and vix we can see that whether the option prices are over valued or under valued and can come to a conclusion whether to buy that security or not. This

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will provide the critical information which can be used by them to conclude whether to trade the stock or not.

LIMITATIONS OF THE STUDY

Paucity of time. Data spread over limited time span i.e.2ND March 2009-28 Feb 2011 Data used in the project is from secondary sources. Few statistical tools will be used. More research and more trading strategies could have been taken into consideration. Response bias.

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CONCLUSION
The project shows how different trading strategies using VIX can be used to earn greater returns. From the study, it is evident that trading strategies such as VIX 5% Rule work can be used by traders to trade in the market. The comparative analysis shows how well they generate buy and sell signals which enable them so as to maximize their efficiency and performance. Though correlation between vix and nifty we can understand that there is negative correlation between them which actually means that when the market goes up the vix goes down and vice versa happens. When the market declines the option prices and vix goes up and when market goes up the option prices and vix goes down. When I compared the historical volatility and vix we could conclude that when options are overvalued and when they are undervalued and when can they be effectively traded. From the analysis of vix and its computation of vix one can understand the various factors which affect the computation of vix and how well they can be used in predicting the value and future volatility which helps in trading.

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FINDINGS

The computation of vix uses various factors such as time to expiry, forward index level

and bid ask prices. From the understanding of these factors one can understand the relationship between them and understand how to effectively use VIX. The VIX 5% Rule has been tested and it shows that it gives trade signal in 58% of the trading sessions and 70% of them are correct with big moves. The correlation was calculated between vix and Nifty which gave negative correlation for all the different durations from which we can conclude that it can be used for hedging and trading purposes. When the historical volatility was calculated and compared with vix it was found that it assits to know whether an option is over valued or under valued which can help investors to trade in a better manner.

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ANNEXTURE
CORRELATION
WEEKLY
Correlations ( WEEK 1)
VAR00002 VAR00002 Pearson Correlation Sig. (2-tailed) N VAR00003 Pearson Correlation Sig. (2-tailed) N 5 -.830 .082 5 5 1 -.830 .082 5 1 VAR00003

Correlations ( WEEK 2)

VAR00002 VAR00002 Pearson Correlation Sig. (2-tailed) N VAR00003 Pearson Correlation Sig. (2-tailed) N 1 -.811 .096 5 -.811 .096 5 5 5 1

VAR00003

Correlations ( WEEK 3)
VAR00002 VAR00003

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VAR00002

Pearson Correlation Sig. (2-tailed) N

-.126 .840

5 -.126 .840 5

5 1

VAR00003

Pearson Correlation Sig. (2-tailed) N

Correlations ( WEEK 4)
VAR00002 VAR00002 Pearson Correlation Sig. (2-tailed) N VAR00003 Pearson Correlation Sig. (2-tailed) N 5 .338 .579 5 5 1 -.338 .579 5 1 VAR00003

Correlations ( WEEK 4)

VAR00002 VAR00002 Pearson Correlation Sig. (2-tailed) N VAR00003 Pearson Correlation Sig. (2-tailed) N 5 -.650 .235 5 5 1 -.650 .235 5 1

VAR00003

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MONTHLY
Correlations (MONTH 1)
VAR00002 VAR00002 Pearson Correlation Sig. (2-tailed) N VAR00003 Pearson Correlation Sig. (2-tailed) N 21 .926(**) .000 21 21 1 .926(**) .000 21 1 VAR00003

** Correlation is significant at the 0.01 level (2-tailed).

Correlations (MONTH 2)
VAR00002 VAR00002 Pearson Correlation Sig. (2-tailed) N VAR00003 Pearson Correlation Sig. (2-tailed) N 20 -.766(**) .000 20 20 1 -.766(**) .000 20 1 VAR00003

** Correlation is significant at the 0.01 level (2-tailed).

Correlations (MONTH 3)

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VAR00002 VAR00002 Pearson Correlation Sig. (2-tailed) N VAR00003 Pearson Correlation Sig. (2-tailed) N 20 -.480(*) .032 20 20 1 -.480(*) .032 20 1

VAR00003

* Correlation is significant at the 0.05 level (2-tailed).

FOR EVERY HALF YEAR

Correlations (HALF YEARLY 1)

VAR00002 VAR00002 Pearson Correlation Sig. (2-tailed) N VAR00003 Pearson Correlation Sig. (2-tailed) N 123 -.264(**) .003 123 123 1 -.264(**) .003 123 1

VAR00003

** Correlation is significant at the 0.01 level (2-tailed).

Correlations (HALF YEARLY 2)

VAR00006 VAR00006 Pearson Correlation Sig. (2-tailed) N VAR00005 Pearson Correlation 125 -.415(**) 1 -.415(**) .000 125 1 VAR00005

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Sig. (2-tailed) N

.000 125 125

** Correlation is significant at the 0.01 level (2-tailed).

TOTAL

Correlations (TOTAL 1)
VAR00002 VAR00002 Pearson Correlation Sig. (2-tailed) N VAR00003 Pearson Correlation Sig. (2-tailed) N 496 -.834(**) .000 496 496 1 -.834(**) .000 496 1 VAR00003

** Correlation is significant at the 0.01 level (2-tailed).

HISTORICAL VOLITILITY VS VIX

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Date 02-Mar09 03-Mar09 04-Mar09 05-Mar09 06-Mar09 09-Mar09 12-Mar09 13-Mar09 16-Mar09 17-Mar09 18-Mar09 19-Mar09 20-Mar09 23-Mar09 24-Mar09 25-Mar09 26-Mar09 27-Mar09 30-Mar09 31-Mar09

Close 2674.6 2622.4 2645.2 2576.7 2620.15 2573.15 2617.45 2719.25 2777.25 2757.45 2794.7 2807.15 2807.05 2939.9 2938.7 2984.35 3082.25 3108.65 2978.15 3020.95

LOG 0.019709 907 0.008656 748 0.026237 166 0.016722 058 0.018100 739 0.017069 732 0.038155 546 0.021105 122 0.007154 89 0.013418 427 0.004444 967 -3.5624E05 0.046241 457 0.000408 26 0.015414 661 0.032277 882 0.008528 699 0.042886 246 0.014269 049 0.012957 937

volatility

VIX 43.17 43.89 42.52 41.49 38.16 40.87 39.27 35.56 36.7 38.43 38.15 37.74 37 38.59 38.02 37.41 37.23 37.58 40.09 39.49

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