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Running Head: How do VIX futures contracts work?How do VIX futures contracts workStudents Name:Instructors Name:Course:Date:1How do VIX futures contracts work?The CBOE volatility index created by Chicago Board Options Exchange (CBOE),popularly known by its Symbol VIX measures the near-term markets expectation ofvolatility. Here volatility refers to the magnitude of change in prices and in the financial world itis often referred to as the market risk or fear gauge (Tim Edward Hamish Preston, 2017).CBOE uses the price of call and puts options to derive the implied volatility. The VIXcalculations are based on the variance of in S&P 500 index call and put options on real-timebasis (Lisa Smith, 2019). VIX is quoted in percentage terms and depicts the range of expectedmovement in the S&P 500 index in the near term. The movements can be on either side, up ordown. Higher the uncertainty among investors about near term S&P 500 index, wider would bethe variance of S&P500 Index Options, hence higher would be the level of VIX. Since itsinception in 1993, VIX has been a popular indicator of how market practitioners think about thenear-term volatility. The higher the volatility, the higher the VIX and vice-versa. Investors oftenuse it to gauge the market volatility and hedge their positional risks, diversify their portfolio andeven to speculate.On March 26, 2004, The CBOE took a step further and transformed VIX into security byintroduci ...


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