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Derivatives

STOXX Eyes European Equity Volatility Index

STOXX is reportedly considering launching a volatility index with the aim of creating a European equivalent of the Chicago Board Options Exchange index of implied volatility on Standard & Poor's 500, the so-called VIX contract.

STOXX is reportedly considering launching a volatility index with the aim of creating a European equivalent of the Chicago Board Options Exchange index of implied volatility on Standard & Poor's 500, the so-called VIX contract. Equity derivatives analysts said there is a lot of interest in volatility indices, following the relaunch of VIX in September and the demand for VIX futures, which are expected to be launched this month (DW 01/11). Elizabeth von Werra, managing director at STOXX in Zurich, declined comment.

In Europe, the VDAX index is used as a measure of implied volatility of the DAX by the forward market, but there is no Europe-wide measure of volatility. A European index would be valuable because products structured on VDAX are not necessarily of interest to investors outside of Germany, explained Joachim Willnow, co-head of structured solutions at Merrill Lynch in London. Merrill has launched several products structured around VDAX, but Willnow said, "Had there been a European volatility index, we would probably have used it as well," said Willnow.

The demand for the index stems from clients wanting forward exposure to volatility, according to equity derivatives traders. Without listed futures, derivatives houses structure forward-starting variance swaps and straddles. The launch of futures on the VIX, providing they become liquid, will enable clients to gain forward exposure to VIX at lower bid/offer spreads. It is not certain, however, that there will be a liquid market for VIX futures and STOXX may choose to wait and see how successful the launch is before marketing its own index, said one structurer.

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