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FRM Part I · FRM Exam Part I · Measuring Return, Volatility, and Correlation

Which statement about the VIX methodology is correct?

The VIX is model-free: it aggregates prices of many out-of-the-money S&P 500 calls and puts, weighted by inverse squared strike, to estimate risk-neutral expected variance. It does not rely on a single option, Black-Scholes inversion, or historical returns.

  1. AIt is computed from a single at-the-money call option on the S&P 500
  2. BIt is a model-free measure based on a weighted strip of out-of-the-money S&P 500 calls and puts, not requiring Black-Scholes inversionCorrect
  3. CIt equals the 30-day historical standard deviation of S&P 500 returns
  4. DIt is derived from S&P 500 futures prices only

Explanation

The VIX uses prices of a wide range of out-of-the-money puts and calls, weighted by the inverse of squared strike, to estimate the risk-neutral expected variance. It does not invert one option price through Black-Scholes and is not historical.

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