The Constant value is calculated to price the basket to = 1.0000 as of 01/01/2014
What is this Index?
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
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.