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JSE launches 'fear' gauge

Johannesburg - With the introduction of the South African Volatility Index (Savi) on Wednesday, the JSE has launched a new tool for investors.

The index operates the same way as the Chicago Board Options Exchange Volatility Index, commonly known as the Vix, which provides a "fear gauge" for leading equities.

"Volatility as an asset class is on the horizon," said Allan Thomson, director of trading at the JSE.

Volatility is an important aspect institutional investors take into account when they value the perceived risk in equity markets. They typically use it to help calculate the worth of futures contracts, or options which expire at some point.

For instance, if investors believe market conditions are likely to be more unpredictable, volatility will carry more weight when they price these contracts.

The Savi is calculated on a three-month rolling basis and tracks volatility trends over the period. Institutions involved in writing futures contracts are polled daily to submit their volatility estimations; these are then used to arrive at an average figure visible to all.

The JSE has also launched the Savi dollar index, which tracks exchange rate volatility. The South African Agricultural Futures Exchange (Safex) has a similar initiative to provide a volatility figure in the trading of white maize.

The Savi rate is available on the JSE's website and other data providers.

At present there are no tools to allow physical trading in the volatility index; however, Thomson said they were on the way.

"At the moment, the trick is finding sufficient market-making depth for them to work," he said.

- Fin24.com

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