JP Morgan launches implied volatility indexes

The VXY and EM-VXY indexes follow aggregate volatility in currencies through a turnover-weighted index of G7 and emerging market volatility, based on three-month at-the-money forward options. The indexes are designed to allow investors to measure aggregate risk premiums in currency markets, calibrate trading strategies and express views on volatility as an asset class.

John Normand, global currency and commodity strategist at the bank in London, said they will largely appeal to institutional investors such as real money managers and medium-term macro investors. He said the specialised nature of volatility trading has limited participation to a small number of clients such as hedge funds, and a broader and more simple index would widen it.

The turnover weights for the indexes are based on the BIS Triennial Central Bank Survey of foreign exchange and derivatives markets in 2001 and 2004. Turnover weights were chosen over trade weights, as they capture demand for various currencies as a function of both commercial and financial demand. The indexes are calculated continuously using JP Morgan's prices, with intraday updates reported on Bloomberg.

The bank is selling exposure to the index through forwards, which cash-settle against the future fixing level. Normand said JP Morgan would release more volatility-related products in 2007.

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