The VARIANSE Currency Volatility Index aims to provide a benchmark for currency market participants to represent investor's expectation over future volatility

The currency pairs chosen are the nine most liquid crosses as measured by the tri-annual BIS survey of 2004, with the weights corresponding to the average daily turnover in each cross.

The main advantage of tracking a currency volatility index as opposed to individual currency crosses is that an investor can avoid taking single currency risk, with the implied volatility on a particular cross typically dependent on the upcoming event horizon of a particular exchange rate and the economic cycle of a particular economy.

Additionally, one can use the index to:

> Take a directional view on volatility
> Express a view on risk-aversion & event risks

Now for the maths...

1. First we calculate the Geometric Mean (GM) of the     Basket

    where:
    N          = Number of components
    Pair N  = Market price of Nth Pair

2. Then we multiply the value A by the constant     factor*

       *A constant factor is used to turn the basket into an
       index which sets the value of the basket to usually
       equal 1 or 100 at a pre-determined date in the past,
       this allows for easier tracking and simpler pricing.