Hang Seng to launch volatility index

Hong Kong will get its own volatility index next month paving the way for financial products that allow investors to hedge against excessive market movements.

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Hang Seng to launch volatility index

Reuters in Hong Kong
31 January 2011

Hong Kong will get its own volatility index next month paving the way for financial products that allow investors to hedge against excessive market movements.

Hang Seng Indexes Company, the company which owns and manages the benchmark indexes in Hong Kong including the Hang Seng index, said it would launch the HSI Volatility index or “VHSI” on February 21.

The index will be modelled on the lines of the Chicago Board of Exchanges VIX index in that it measures the 30-calendar-day expected volatility of the Hang Seng index using prices of options traded on the index.

The VIX is based on options on the S&P 500. The index bounced off near record lows on Friday after unrest in Egypt sparked a sell-off in risky assets worldwide.

Volatility had fallen broadly amid a rally in stocks since early 2009, hitting hedge funds who trade volatility as an asset class using option contracts.

“The VHSI provides a useful indicator in hedging against the potential downturn of the underlying stock market,” said the Hang Seng Indexes Company in a statement.

The index will be calculated and disseminated real time starting Feb. 21 and is backdated to January 2, 2001.

The index provider said the VHSI would have been at 18.8 at end-last year, down from a year-high of 39.3 in May around the time that news of a European debt crisis first surfaced, and off a record high of 104.3 after Lehman Brothers declared bankruptcy.

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