CoachA VIX future is a cash-settled future on the value of the volatility index at its expiry. Since the index cannot be bought and held, the future is not tied to today’s index by a cost of carry: it is the market’s price for where the index will be.
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Example 25.9 (5 February 2018)
On Monday 5 February 2018 the S&P 500 fell 4% and the volatility index rose 20 points in the day. Exchange-traded products giving leveraged or inverse exposure to the front futures, with about $4 billion of assets at the end of 2017, had to rebalance at the end of the day, and, by the arithmetic of Proposition 14.10, both kinds had to buy futures after a rise. A central-bank analysis describes the resulting loop: their buying pushed the futures higher, which increased the amount they had to buy. The largest inverse product lost nearly all of its value in that session and was then terminated by its issuer.