The higher levels on the futures contract few months

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Reference no: EM132261498

The CBOE Volatility Index, or VIX, hit a new intraday low in late April 2016, which marked a fresh low for the year. It remains quite soft. (See chart above) The VIX, which is often called the “fear gauge” because it measures market turbulence, is based on prices of S&P 500 options. Investors tend to rush to these options when they’re fearful of stock-market declines, hence its nickname. The decline in the market’s fear gauge is making some investors nervous. The concerns that have dogged markets in recent months — sluggish global growth and declining earnings — continue to exist. To be sure, the level of complacency implied by the low VIX does not correspond with all that we’re hearing about how disappointing corporate earnings are currently. While the VIX remains unusually low, futures contracts tied to the index that expires a few months out are sharply higher, meaning the term structure of the VIX is quite steep.

a) What does the higher levels on the futures contract a few months out imply about the market’s expectation about stock prices a few months from now?

b) Some professionals argue that the slope of the VIX curve, as measured by futures contract prices, matters more than the level. What does this mean? Do you agree?

Reference no: EM132261498

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